ABSTRACT

This chapter investigates the price discovery mechanism in real estate investment markets. That is, price discovery in direct real estate investment and indirect real estate investment in the stock market. The analysis takes into account both the long-run and short-term relationships between these two investments and, therfefore adopts the cointegration approach. In real estate research, there are several other reasons to use the cointegration techniques The difficulties in compiling a reliable transaction driven real estate index have prompted many real estate researchers to use some sort of proxies to a real estate index. In the US, real estate investment trusts (REITs) are widely used for this purpose. In the UK, there is no exact REIT counterpart, and the share price/ total return index of real estate companies seems to be the only source with this merit. The US REITs and the UK real estate company shares are indirect investment in real estate as the investment is channelled to real estate via REITs or real estate company shares. Obviously the investment in real estate companies is different to the direct investment in real estate. A typical real estate company is usually geared, it has diversified activities, and its performance may diverge from the performance of the properties it manages and controls in the short term. Although indirect real estate investment is associated with direct real estate investment, real estate company share prices may outperform or underperform direct real estate investment. The ways in which the two investments are linked are subject to empirical investigations.