Open AccessInternational Real Estate Review
Author(s) -
William Mingyan Cheung,
James Chicheong Lei,
Desmond Tsang
Publication year - 2016
Publication title -
journal of the asian real estate society
Language(s) - English
Resource type - Journals
ISSN - 1029-6131
DOI - 10.53383/100214
Subject(s) - real estate , real estate investment trust , price discovery , database transaction , capitalization rate , business , financial economics , corporate real estate , investment (military) , cost approach , transaction cost , economics , monetary economics , finance , computer science , database , futures contract , politics , political science , law
This study examines whether property transaction affects the price discovery process in real estate markets. Prior literature shows that price discovery generally first takes place in the securitized public real estate investment trust (REIT) market. We conjecture that property transaction provides novel information to the direct real estate market and can change the dynamics between public and private real estate returns. We employ a unique dataset of property transactions to construct "transaction windows¨ and specifically examine the causality between public and private real estate markets around these periods. We form firm-level pairs of public and private price series, and estimate the normalized common factor loadings per Gonzalo and Granger (1995) by using a vector error-correction model. Our findings show that a significant proportion of price discovery happens in the private market instead of the public REIT market. Our results are robust to investments of different property types and different lengths of transaction windows. Overall, the findings in this study imply that property acquisition and disposition provide crucial information to the private real estate market and induce a reverse causality between the public and private markets.