REITs, interest rates and stock prices in Malaysia

Transcription

1 Deparmen of Economics Issn Discussion paper 01/11 REITs, ineres raes and sock prices in Malaysia Hooi Hooi Lean 1 and Russell Smyh 2 Absrac This paper examines he dynamic linkages beween real esae invesmen russ (REITs), which are a proxy for invesmen in real esae, ineres raes and sock prices in Malaysia over he period 2006 o Two mechanisms have been proposed o inerpre he relaionship beween invesmen in real esae and socks. The firs is he wealh effec, which saes ha invesors wih unanicipaed gains in share prices will inves in real esae. The second is he credi-price effec, which saes ha if real esae prices increase, firms holding commercial real esae will have large unrealized capial gains, meaning ha invesors will bid up he equiy value of he firm. This suggess ha he housing marke will lead he sock marke. Over he period 2006 o 2009, real esae and sock prices have surged in andem in Malaysia. We find evidence of a wealh effec in he shor-run, while in he long-run for some REITs we find suppor for he wealh effec, while for ohers we find evidence of feedback effecs beween real esae and socks. This finding is consisen wih a spiralling upurn in boh prices and provides suppor for boh effecs operaing ogeher. The resuls lend suppor o concerns ha he Malaysian real esae marke is characerized by an asse bubble and ha a decline in he sock marke could burs he Malaysian real esae bubble. Keywords: REITs, ineres raes, sock prices, Malaysia JEL classificaion codes: G15, E44 Conference caegory: economic and finance 1 Economics Program, School of Social Sciences, Universii Sains Malaysia, Malaysia. 2 Deparmen of Economics, Monash Universiy, Ausralia 2011 Hooi Hooi Lean and Russell Smyh All righs reserved. No par of his paper may be reproduced in any form, or sored in a rerieval sysem, wihou he prior wrien permission of he auhor.

2 1 REITs, ineres raes and sock prices in Malaysia Inroducion Housing and socks can be considered as invesmen alernaives. Boh real esae and socks are ofen imporan asses in many invesors porfolios. Several auhors have argued ha commercial real esae offers diversificaion benefis o insiuional invesors because of is low correlaion wih commonly used sock price indices (see Quan & Timan, 1999). Two mechanisms have been proposed in he lieraure o inerpre he relaionship beween real esae prices and sock prices (Kapopoulos & Siokis, 2005). The firs is he wealh effec. The wealh effec suggess ha households wih unanicipaed gains in share prices will increase he amoun of housing. Hence, he sock marke will lead he housing marke. This will occur hrough wo channels because housing is boh a consumpion and invesmen good. One channel is ha an increase in share marke wealh will resul in an increase in aggregae consumpion. The oher channel is hrough invesmen porfolio adjusmen. When share prices increase, he share of households porfolios in he sock marke will increase and households will seek o rebalance heir porfolios hrough selling socks and purchasing oher asses, including housing (Markowiz, 1952). The second mechanism linking housing and sock prices is he credi-price effec, which focuses aenion on he balance shee posiion and collaeral value of credi consrained firms. Since commercial and residenial propery can ac as collaeral for loans, when real esae prices increase, credi consrained firms are able o borrow more for invesmens. The credi-price effec ends o sugges ha he housing marke will lead he sock marke because firms holding commercial real esae will have large unrealized capial gains ha will mean ha invesors will bid up he equiy value of he firm. However, since firms demand more land and buildings o carry ou expanded invesmen, he price of commercial, as well as residenial, propery will also increase,

3 2 suggesing an upward spiral in boh propery and sock prices and persisen feedback effecs. Feedback effecs beween he wo markes are consisen wih he exisence of boh effecs. Several sudies have examined he relaionship beween real esae prices and sock prices. Mos of he early sudies were for he Unied Kingdom or he Unied Saes and focused on correlaions beween he wo asses reurns (see eg. Ibboson & Siegel, 1984; Harzell, 1986; Worzala & Vandell, 1993; Eichholz & Harzell, 1996). Mos of hese sudies found he correlaion beween housing and sock reurns o be negaive. However, none of hese sudies provide any indicaion as o wheher he credi-price or wealh effecs are in operaion because no inference can be made abou he direcion of causaion. More recen sudies have applied coinegraion and Granger causaliy o ime series daa o examine he causal ineracions beween housing and sock prices. These sudies include Chen (2001) Taiwan; Suon (2002) Ausralia, Canada, Unied Kingdom, Unied Saes, Ireland and Neherlands; Green (2002) four geographic locales in California wih differen housing prices; Kakes and Van den End (2004) Neherlands; Kapopoulos and Siokis (2005) Greece; Sim and Chang (2006) Souh Korea; Ansari (2006) Unied Saes; and Ibrahim (2010) Thailand. Overall, Ansari (2006) and Sim and Chang (2006) found suppor for he credi-price effec. Each of he oher sudies, hough, found suppor for he exisence of a wealh effec. This paper conribues o he lieraure by examining he relaionship beween he real esae marke and sock marke for Malaysia. To his poin mos sudies have focused on advanced markes and here are few sudies of he dynamic linkages beween real esae and sock markes for developing markes. Malaysia has experienced a relaively high rae of economic growh. Beween 2006 and 2009, Malaysia s economic growh averaged jus under 6 per cen. Housing prices and sock prices peaked prior o he Unied Saes sub-prime crisis. Boh

4 3 fell in he afermah of he sub-prime crisis, bu boh housing prices and sock prices have srongly rebounded in parallel following he crisis. Sock prices in Malaysia increased prior o he Unied Saes sub-prime crisis. The Kuala Lumpur Composie Index (KLCI) finished 2007 on 1,445 poins, up from 1,096 poins a he end 0f 2006 (World Bank, 2008). Sock prices fell in he afermah of he sub-prime crisis. On March 10, 2008 alone he KLCI dropped 9.5 per cen (World Bank, 2008). However, since he sub-prime crisis, he KLCI has rebounded srongly. In December 2009, he Kuala Lumpur Composie Index (KLCI) was 45 per cen higher han is lowes poin of 838 poins in March 2009 (Raj, 2010). In he period since he sub-prime crisis in he Unied Saes, housing prices have increased sharply, paricularly in Kuala Lumpur, he Klang Valley and Penang. To illusrae, a errace house in he Klang Valley sold for abou RM400,000 in 2008, bu in 2010 i cos over RM700,000. In 2010, semi-deached and deached houses in he Klang Valley sold for more han RM2 million. 1 In 2010, Penang new condominiums sold for RM600 o RM700 per square mere, semi-deached houses and erraced houses wih some land were selling for more han RM1 million and bungalows from RM3.5 million o RM4 million (Ng, 2010). There are several reasons for he increase in housing prices (Ng, 2010). Firs, here has been an increase in foreign acquisiion of propery in Malaysia. This rend has been encouraged by governmen policies promoing foreign ownership of propery (such as he my second home program ). Second, here has been subsanial propery developmen wih low enry coss for new home owners (propery developers are allowing down paymens of 5-10 per cen). Third, here have been a range of flexible morgages available coupled wih low ineres raes o 1 A real esae bubble <Mysinchew.com> 15 May 2010 (las accessed 19 July, 2010).

5 4 simulae economic growh, following he sub-prime crisis. Fourh, Malaysia is a developing counry which has undergone rapid urbanisaion as a resul of srucural change in he economy. The urbanisaion rae was 38.8 per cen in 1980 before almos doubling o 62 per cen in 2000 and 66.9 per cen in 2005 (Jaafar, 2004). Such rends creae excess demand for housing and push up prices (Hui, 2009). Fifh, demographic saisics from Ng (2006) sugges ha populaion in Malaysia consiss of a much larger number of working aduls han reirees. Over 60 per cen of he populaion are in he age group of 15-64, while less han 5 per cen of he populaion are over 65. This implies ha a bigger pool of firs-ime buyers and up-graders exiss relaive o he pool of households rading down, which push prices up (Hui, 2009). Sixh, he Malaysian governmen s economic developmen sraegy is conribuing o higher prices in some areas as i rezones land. For example, in 2010 i was announced ha he Malaysian governmen and he Employee Providen Fund will form a join venure o develop a 3000 acre rac of land in Sungai Buloh ino a new hub for he Klang Valley. 2 There is evidence of speculaion in housing markes. This has creaed fears of an asse bubble in he housing marke. 3 The surge in housing prices and sock markes following he subprime crisis is also apparen in oher pars of Asia. The value of major sock indices in China, India and Indonesia doubled in 2009, while propery prices in major regional cenres, such as Hong Kong, Shanghai and Singapore, experienced subsanial growh hroughou As a resul, propery prices in many Asian counries were nearing previous highs and many Asian asse markes are being characerized in erms of bubbles (Bryson & Kamaruddin, 2010). 2 A real esae bubble <Mysinchew.com> 15 May 2010 (las accessed 19 July, 2010). 3 A real esae bubble <Mysinchew.com> 15 May 2010 (las accessed 19 July, 2010).

6 5 The parallel surge in housing and sock prices in Malaysia since he sub-prime crisis raises he issue of wheher here is a long-run relaionship beween he wo variables and, if so, is here a credi-price or wealh effec driving he long-run relaionship beween he variables. The purpose of his paper is o examine he relaionship beween Real Esae Invesmen Truss (REIT), sock prices and ineres raes in Malaysia. Reliable daa on direc invesmen in real esae is no available. However, one can indirecly rade real esae hrough REITs. REITs have wo defining characerisics; heir primary business is managing groups of income-producing properies and hey disribue mos of heir profis as dividends o shareholders. Generally REITs disribue 90 per cen of axable profis as dividends. In conras o uni russ, REITs are acively raded on sock exchanges and form an avenue for exploring he linkages beween sock and real esae invesmens (Surahmanyam, 2007). The srengh of he causal relaionship beween housing and sock prices will depend on he exen o which purchasing real esae is considered an invesmen (Ansari, 2006). As menioned above, he Malaysian governmen is keen o arac more foreign propery invesors, paricularly from India, Singapore and he Unied Kingdom. Malaysia s Foreign Invesmen Commiee has deregulaed invesmen guidelines wih a view o making i easier for foreigners o purchase propery. To his poin, foreign invesors from India, Korea, Singapore and he Unied Kingdom have been he bigges invesors in he counry, invesing on average US$150,000 o US$300,000 wih Kuala Lumpur, Penang and Johor he mos popular desinaions. 4 REITs are considered a new secor on he Malaysian sock marke compared o heir presence in developed markes. In December 2009, Malaysia's REITs had a marke capializaion of US$1540 million, which was less han marke capializaion in Singapore and Hong Kong where he corresponding figures were US$20617 million and 4 Malaysia keen o arac overseas propery invesors as analyss predic seady real esae recovery <hp:// marke> (las accessed 19 July, 2010).

7 6 US$9521 million respecively. 5 There are no many REITs lised in Bursa Malaysia and he rade volume is low. Many are under priced. However, invesors believe ha REITs are profiable wih good prospecs and wih housing prices booming, coupled wih relaively low ineres raes, Bursa Malaysia has been promoing REIT o invesors. Consisen wih he recen lieraure on his opic, we employ a uni roo, coinegraion and Granger causaliy esing framework. Because he housing and sock markes have been poenially subjec o a major srucural break in he form of he sub-prime crisis over he period we examine, we allow for a srucural break in he uni roo and coinegraion ess. While he focus is on he relaionship beween real esae and sock markes, employing bivariae analysis is no saisfacory because he relaionship beween he variables migh be spurious reflecing common facors (Quan & Timan, 1999; Ibrahim, 2010). This suggess ha oher conrol variables need o be added. We use he ineres rae, which is likely o be a key deerminan of an invesor s abiliy o borrow o finance invesmen in he housing marke and sock marke (Chen, 2001). The availabiliy of credi has been shown o be imporan in reinforcing boom-bus cycles in asse markes (see Oikarinen, 2009). Daa The sample consiss of daily daa on 13 REITs, he KLCI and he inerbank deposi raes (proxy for ineres rae) for he period from 3 January 2006 o 31 March We have daa on 13 REITs as follows: Amanah Hara Tanah PNB 1 (AHP1), Amanah Hara Tanah PNB 2 (AHP2), AmFIRST (AMFIRST), Al- Aqar KPJ (ALAQAR), ATRIUM, AMANAHRAYA (ARREIT), Axis Real Esae Invesmen Trus (AXREIT), Al-Hadharah Bousead 5 hp:// (las accessed 19 July, 2010).

8 7 (BSDREIT), HEKTAR, Quill Capia Trus (QCAPITA), Sarhill Real Esae Invesmen Trus (STARREIT), Tower Real Esae Invesmen Trus (TWRREIT) and UOA Real Esae Invesmen Trus (UOA REIT). Mos of hese REITs have invesmens predominanly, or exclusively, in Malaysian commercial real esae. Excepions are ALAQAR wih invesmens in hospials in Bangladesh, Indonesia and Malaysia and BSDREIT, which is an Islamic planaion-based REIT. AHP1 and AHP2 were lised in 1989 and 1990 respecively, while he ohers have been lised since For he purposes of his sudy, he 13 REITs have differen saring daes as follows: Group 1: 3/1/ AHP1, AHP2, AXREIT, STARREIT, UOAREIT; Group 2: 12/4/2006 TWRREIT; Group 3: 10/8/2006 ALAQAR; Group 4: 4/12/2006 HEKTAR; Group 5: 21/12/2006 AMFIRST; Group 6: 8/1/2007 QCAPITA; Group 7: 8/2/2007 BSDREIT; Group 8: 26/2/2007 ARREIT; and Group 9: 2/4/2007 ATRIUM. The ime span on all he series is dicaed by daa availabiliy. Table 1 displays he summary descripive saisics for he ineres rae, KLCI and 13 REITs. Only wo ou of he 13 REITs showed posiive reurns during he sample period. AHP2 has he highes reurn while ATRIUM has he lowes. Mos of he REITs exhibi negaive skewness. Each of he Jarque-Bera saisics are saisically significan, meaning ha all of he series are no normally disribued, which is a common feaure of financial daa. Mehodology Order of Inegraion of he Variables All daa were ransformed o naural logarihms before he analysis. Alhough he REITs have differen saring daes, he number of observaions for each REIT is more han 500 which is sufficienly long for he uni roo analysis. We begin wih esing he order of inegraion of he variables. We firs applied he sandard Augmened Dickey Fuller (ADF) uni roo ess. Perron (1989) showed ha he power o rejec he null of a uni roo decreases when he saionary alernaive is rue and a srucural break is ignored. Hence, o furher examine he

9 8 saionariy properies of he daa for each series, we employ he lagrange muliplier (LM) uni roo es wih one srucural break proposed by Lee and Srazicich (2003). In conras o he Perron (1989) and Zivo and Andrews (1992) ADF-ype uni roo ess, he LM uni roo es has he major advanage ha is saisical properies are unaffeced by he exisence of a srucural break under he null hypohesis (see Lee and Srazicich, 2003). The LM uni roo es can be explained wih he following daa generaing process (DGP): y Z e, e e 1. Here, Z consiss of exogenous variables and is an error erm wih classical properies. Lee and Srazicich (2003) developed wo versions of he LM uni roo es wih one srucural break. Using he same nomenclaure as employed by Perron (1989), Model A is known as he crash model, and allows for a one-ime change in he inercep under he alernaive hypohesis. Model A can be described by Z 1,, D ', where D 1 for T B 1, and zero oherwise; T B is he dae of he srucural break, and δ' = (δ 1, δ 2, δ 3 ). Model C, he crash-cum-growh model, allows for a shif in he inercep and a change in he rend slope under he alernaive hypohesis. I can be described by Z 1,,, ' D DT, where DT TB for T B 1, and zero oherwise. The LM uni roo es saisic is obained from he regression: y Z S 1, where S y ˆ ˆ x Z, 2,..., T ; ˆ are coefficiens in he regression of y on Z ; ˆ x is given by y Z ; and y 1 and Z 1 represen he firs observaions of y and Z respecively. The LM es saisic,, is given by he -saisic for esing he uni roo null hypohesis ha 0. The locaion of he srucural break T is deermined by selecing all B

10 9 possible break poins for he minimum -saisic as follows: inf inf i, where T B T. The search is carried ou over he rimming region (0.15T, 0.85T), where T is sample size. To selec he lag lengh, we used he general o specific procedure proposed by Hall (1994). We se he maximum number of lags equal o eigh and used he 10 per cen asympoic normal value of o ascerain he saisical significance of he las firsdifferenced lagged erm. Afer deciding he opimal lag lengh for each breakpoin, we ascerained he break where he endogenous LM saisic is a a minimum. Criical values for he LM uni roo es wih one srucural break are abulaed in Lee and Srazicich (2003). Coinegraion Once he order of inegraion of each of he variables is ascerained, we proceed o es for coinegraion. The exisence of coinegraion would imply ha even hough each individual series is non-saionary, one or more linear combinaions of hem are saionary. The long-run mulivariae model esimaed for each REIT is as follows: ln REIT ln IR ln SP (1) 1 2 where ln REIT,ln IR and ln SP are he naural logs of he REIT, ineres rae and KPCI respecively, while he erm is he serially independen random error wih mean zero and finie covariance marix. This equaion is used o es wheher he REIT, ineres rae and KLCI are coinegraed. Gregory and Hansen (1996) proposed hree models for esing coinegraion where here is a srucural break in he coinegraing vecor. The firs conains a level shif (Model C): ln REIT D ln IR ln SP, 1,..., n (2)

11 10 The second model conains a level shif and rend (Model C/T): ln REIT D ln IR ln SP, 1,..., n (3) Here D 0 for and 1 D for 1, while 2 is he change in inercep due o he level shif.. The inercep before he level shif is denoed as The hird model allows for a regime shif (Model C/S): ln REIT D ln IR ln SP ln IR D ln SPD, 1,..., n 3 4 (4) Here, 1 and 2 are as in Equaions 2 and 3. 1 and 2 denoes he coinegraing slope coefficien before he regime shif; and 3 and 4 denoe he change in he slope coefficien. In order o es for coinegraion beween REIT and IR and SP wih srucural change, i.e. he saionariy of in Equaions 2 4, Gregory and Hansen (1996) propose a suie of ess. These saisics are he commonly used ADF saisics and exensions of he Z and saisics proposed by Phillips (1987). These saisics are defined as: Z es ADF * inf T ADF Z Z * * inf Z T inf Z T As he break poin,, is unknown a priori, he model is esimaed recursively allowing he break poin o vary beween (0.15T, 0.85T), where T is he sample size. The null hypohesis of no coinegraion is examined using he hree saisics wih ineres in he smalles values for he hree saisics across all break poins required o rejec he null. Granger Causaliy

12 11 Once i is esablished wheher or no here is a long-run relaionship beween he series, we es wheher here is Granger causaliy beween ineres raes, REITs and sock prices. If ineres raes, REITs and sock prices are coinegraed, an error correcion erm should be included in he mulivariae auoregression model as follows (Granger, 1988) k k k ln REIT ln REIT ln IR ln SP ECT 1i i 1i i 1i i 1 1 i1 i1 i1 k k k ln IR ln REIT ln IR ln SP ECT 2i i 2i i 2i i 2 1 i1 i1 i1 k k k ln SP ln REIT ln IR ln SP ECT 3i i 3i i 3i i 3 1 i1 i1 i1 where Δ is he firs difference, ECT is he error correcion erm derived from Equaion (1) and all variables are as defined above. The VECM combines he long-run informaion as well as heir shor-run dynamics; specifically, he lagged error correcion erm depics long-run causaliy while he lagged firs difference variables depic shor-run causaliy. To illusrae he difference beween shor-run and long-run Granger causaliy assume ha here is a long-run equilibrium relaionship beween sock prices and REITs, sock prices Granger cause REITs and a shock occurs ha changes sock prices. The shock will affec he dynamic pah of REITs in wo ways. Firs here is a shor-run ransiory impac ha is capured by he coefficiens on REITs. Second, here is hen a furher long-run impac hrough he error correcion erm operaing o resore he long run equilibrium. This long-run impac is absen in he case when only he shor-run causaliy is presen. If we have only shor-run causaliy a change in sock prices Granger causes only a shor erm change in REITs. However, if we have boh shor-run and long-run causaliy wo impacs operae, he shor erm impac, and a long erm impac as equilibrium beween he variables is resored.

13 12 The presence of long-run causaliy is based on he significance of he error-correcion coefficien using he sandard es. We apply sandard F-ess o he k lagged coefficiens of each variable o make Granger causal inferences. In paricular, we es he hypoheses below: H :... 0 for he pairwise causaliy relaionship running from IR o REIT k H :... 0 for he pairwise causaliy relaionship running from REIT o IR k There are four alernaive causaliy relaionships from he hypoheses above. Firs, if we rejec H 01 bu do no rejec H 02, his implies Granger causaliy is running from IR o REIT. Second, if we do no rejec H 01 bu rejec H 02 his implies ha Granger causaliy is running from REIT o IR. Third, if we rejec boh H 01 and H 02 his means ha here is a feedback effec beween REIT and IR. Fourh, if we do no rejec H 01 or H 02, his means ha REIT and IR are independen. The same explanaion can be applied for he oher pair of variables. Resuls The resuls of he ADF es are repored in Table 2. AHP2, ALAQAR and QCAPITA are inegraed of order zero (I(0)) wih consan and rend included; however, hey do no rejec he null of a uni roo if he series are esed wihou consan and rend. The oher nine series are each inegraed of order one (I(1)). The resuls for he LM uni roo es wih one srucural break are presened in Tables 3 and 4. In Model A, we find ha he uni roo null for AHP2 and ARREIT is rejeced a he 5 per cen level and in Model C he uni roo null for AHP2 is again rejeced a he 5 per cen level. All oher series are (I(1)) a he per cen level or beer for boh models. In Model A, he break in he inercep is saisically significan a he 5 per cen level or beer for each of he variables excep he ineres rae. In Model C, excep for HEKTAR and UOAREIT, he break in he inercep and/or slope is saisically significan a he 5 per cen level or beer in each case. The breakpoins for he REITs mosly

14 13 coincide wih he wors monhs of he subprime crisis in July o Sepember, In Model A, he breakpoin for KLCI is on he nex Monday afer he welfh General Elecion which is ofen described as a poliical sunami in Malaysia, in which he ruling Barisan Naional Pary los governmen in five saes and is wo-hird majoriy in he Parliamen. The resuls of he Gregory and Hansen (1996) coinegraion es wih a srucural break are presened in Table 5. There are a range of break poins across he es saisics and models, bu almos all coincide wih he subprime morgage crisis. We find srong evidence of coinegraion beween he REIT, ineres rae and sock index for mos of he REIT excep AXREIT, ATRIUM and STARREIT. The null hypohesis of no coinegraion is no rejeced wih any of he es saisics for any of he hree models (C, C/T, C/S) for AXREIT. For ATRIUM, he null hypohesis is rejeced wih * Z for model C/T a he 10 per cen level. For STARREIT, he null hypohesis is rejeced for model C/T wih he hree es saisics. Table 6 presens he Granger causaliy resuls. For 12 of he 13 REITs we include an errorcorrecion erm. For AXREIT, we only es for shor-run Granger causaliy. Beginning wih he shor run, here is no shor run Granger causaliy beween IR and he oher wo variables excep for BSDREIT, for which Granger causaliy is running one way from REIT o IR. A he 5 per cen level or beer here is unidirecional Granger causaliy in he shor run running from SP o REIT, consisen wih a wealh effec, for AHP1, AHP2, AMFIRST, AXREIT, QCAPITA, STARREIT, TWRREIT and UOAREIT. For ALAQAR, BSDREIT and HEKTAR, REIT and SP are independen in he shor run. Turning o he long-run, for six REITs (AHP2, AMFIRST, ATRIUM, QCAPITA, STARREIT, UOAREIT) here is long-run Granger causaliy running from REIT and SP o IR. There is srong suppor for he wealh

15 14 effec. For five REITs (ATRIUM, BSDREIT, HEKTAR, TWRREIT, UOAREIT) unidirecional Granger causaliy runs from IR and SP o REIT a he 5 per cen level or beer in he long run, consisen wih he wealh effec. For four REITs (AHP1, AHP2, ALAQAR, ARREIT), here is bidirecional Granger causaliy beween REIT and SP a he 5 per cen level or beer in he long run. The feedback effec is consisen wih boh a wealh effec and a credi-price effec and can be a poenial explanaion of spiralling upurns of boh prices. For hree REITs (AMFIRST, QCAPITA, STARREIT), IR and SP are independen, meaning ha he wo markes are segmened in he long-run. For hose cases where he errorcorrecion erm is significan, given deviaions from long-run equilibrium, he speed of adjusmen owards he long-run equilibrium is faser for REITs han SP. Conclusion The main finding is his paper ha for some REITs here is a wealh effec and for ohers here is a feedback effec, consisen wih a spiralling upurn in boh housing and sock markes, lends credence o concerns ha he Malaysian real esae marke is characerized by an asse bubble and ha a decline in he sock marke could burs he Malaysian real esae bubble. Such an explanaion places he sock marke cenre sage and suggess ha he sock marke is crucial for sabiliy in he real esae marke. This resul is similar o Ibrahim s (2010) findings for Thailand. He argued ha he burs in he Thai housing marke following he Asian financial crisis in was a resul of declining sock markes. The resul is also consisen wih he findings of oher sudies ha he sock marke Granger causes economic growh in Malaysia (see eg. Mun e al., 2008). The policy implicaion of finding widespread evidence of a wealh effec is ha policymakers should implemen policies o promoe sabiliy in he sock marke. Following he Asian financial crisis, he Kuala Lumpur Sock Exchange and Securiies Commission pu in place a series of sandards designed o

16 15 improve ransparency, disclosure, accouning and corporae governance, bu hese sandards sill fall shor of inernaional sandards (Shimomoo, 1999). As i sands, for mos of he period sudied here has been a posiive wealh effec, reinforced by a posiive credi-price effec, in he Malaysian asse marke. As a resul he real esae and sock markes have had posiive feedback effecs on each oher. Bu, if sock markes were o decline, a negaive wealh effec would have a large negaive impac on he real esae marke and his would hen feedback o he sock marke creaing a downward spiral in prices. One of he limiaions of his sudy is ha he sample is consrained due o he availabiliy of daa on REITs. REITs are sill an embryonic form of invesmen in Malaysia and, as such, may no be a very good proxy for invesmen in real esae. Furher research is needed for oher Asian markes, such as Singapore, in which REITs are more esablished. A second poenial limiaion is ha we have looked a he relaionship beween invesmen in real esae, proxied by he REITs, and he sock marke for Malaysia as a whole. If consisen daa in housing prices in propery ho spos such as Kuala Lumpur, he Klang Valley and Penang were o become available, fuure research could examine if here are differences in he dynamic linkages beween real esae and socks beween geographical areas wih differen price levels. As poined ou by Green (2002) and Kapopoulos and Siokis (2005), a more expensive housing marke could be a prime candidae for he wealh effec o be large.

17 16 References Ansari, M.I. (2006), The US housing boom and he sock marke decline: searching for a causal nexus, Finance India, Vol. 20, pp Bryson, J. and Kamaruddin, Y. (2010) 2010: Year of he Tiger or Asian Bubble?, Wells Fargo Securiies, January 28 hp://wellsfargo.com/research (las accessed July 19, 2010). Chen, N.-K. (2001), Asse price flucuaions in Taiwan: evidence from sock and real esae prices 1973 o 1992, Journal of Asian Economics, Vol. 12, pp Eichholz, P. and Harzell, D. (1996), Propery shares, appraisals and he sock marke: an inernaional perspecive, Journal of Real Esae Finance and Economics, Vol. 12, pp Granger, C.W.J. (1988), Causaliy, coinegraion and conrol, Journal of Economic Dynamics and Conrol, Vol. 12, pp Gregory, A.W. and B. Hansen (1996), Residual Based Tess for Coinegraion in Models wih Regime Shifs, Journal of Economerics, Vol. 70, pp Green, R. (2002), Sock prices and house prices in California: New evidence of a wealh effec? Regional Science and Urban Economics, Vol. 32, pp Hall, A.D. (1994), Tesing for a uni roo in ime series wih prees daa based model selecion, Journal of Business and Economic Saisics, Vol. 12, pp Harzell, D. (1986), Real esae in he porfolio, in Fabozzi, F.J. (Ed.), The Insiuional Invesor: Focus on Invesmen Managemen, Balliger, Cambridge, MA.

18 17 Hui, H.C. (2009), The impac of propery marke developmens on he real economy of Malaysia, Inernaional Research Journal of Finance and Economics, Vol. 30, pp Ibboson, R. and Siegel, L. (1984), Real esae reurns: a comparison wih oher invesmens, AREUEA Journal, Vol. 12, pp Ibrahim, M.H. (2010), House price-sock price relaions in Thailand: an empirical analysis, Inernaional Journal of Housing Markes and Analysia, Vol. 3, pp Jaafar, J. (2004), Emerging rends of urbanisaion in Malaysia, Journal of he Deparmen of Saisics Malaysia, Vol. 1, pp Kakes, J. and Van Den End, J.W. (2004), Do sock prices affec house prices? Evidence for he Neherlands, Applied Economics Leers, Vol. 11, pp Kapopoulos, P. and Siokis, F. (2005), Sock and real esae prices in Greece: Wealh versus crediprice effec, Applied Economics Leers, Vol. 12, pp Lee, J., and Srazicich, M.C. (2003) Minimum Lagrange muliplier uni roo es wih wo srucural breaks, Review of Economics and Saisics, 85, Markowiz, H. (1952) Porfolio Selecion, Journal of Finance, Vol. 7, Mun, H.W., Long, B.S., Siong, E.C. and Thing, T.C. (2008), Sock marke and economic growh in Malaysia: Causaliy es, Asian Social Science, Vol. 4, pp Ng, A. (2006), Housing and morgage markes in Malaysia. In: Kusmiarso B (Ed.), Housing and Morgage Markes in SEACEN Counries, SEACEN Publicaion, pp

19 18 Oikarinen, E. (2009), Ineracion beween housing prices and household borrowing: The Finnish case, Journal of Banking and Finance, Vol. 33, Perron, P. (1989), The grea crash, he oil price shock and he uni roo hypohesis, Economerica, Vol. 57, pp Quan, D.C. and Timan, S. (1999), Do real esae prices and sock prices move ogeher? An inernaional analysis, Real Esae Economics, Vol. 27 No. 2, pp Raj, C. (2010), Helpful insigh, Malaysian Business, March 16. Shimomoo, Y. (1999), The capial marke in Malaysia, Asian Developmen Bank, Manilla. Sim, S.-H. and Chang, B.-K. (2006), Sock and real esae markes in Korea: wealh or credi-price effec, Journal of Economic Research, Vol. 11, pp Subrahmanyam, A. (2007) Liquidiy, reurn and order flow linkages beween REITs and he sock marke, Real Esae Economics, Vol. 35, pp Suon, G.D. (2002), Explaining changes in house prices, BIS Quarerly Review, Sepember, pp World Bank (2008), Eas Asia: Tesing Times Ahead. World Bank: Washingon DC. Worzala, E. and Vandell, K. (1993), Inernaional direc real esae invesmens as alernaive porfolio asses for insiuional invesors: an evaluaion, paper presened a he 1993 AREUEA Meeings, Anaheim, CA. Zivo, E., and Andrews, D., (1992), Furher evidence of he grea crash, he oil-price shock and he uni-roo hypohesis, Journal of Business and Economic Saisics, Vol. 10, pp

20 19 Table 1: Descripive saisics Series Mean Sd. Dev. Skewness Kurosis Jarque-Bera n Ineres Rae KLCI AHP AHP ALAQAR AMFIRST ARREIT ATRIUM AXREIT BSDREIT HEKTAR QCAPITA STARREIT TWRREIT UOAREIT

21 20 Table 2: ADF uni roo es series level Firs difference lag -saisic lag -saisic Ineres Rae *** KLCI *** AHP *** AHP ** *** ALAQAR ** *** AMFIRST *** ARREIT *** ATRIUM *** AXREIT *** BSDREIT *** HEKTAR *** QCAPITA *** *** STARREIT *** TWRREIT *** UOAREIT *** * ( ** ) *** denoe saisical significance a he 10%, 5% and 1% levels respecively.

22 21 Table 3: LS es Model A wih a Srucural Break TB k S -1 1 B Ineres rae (IR) 29/8/ ( ) (0.7859) (1.1196) KLCI 10/3/ *** ( ) (0.5712) (4.0360) AHP1 5/9/ *** ( ) (1.3839) ( ) AHP2 4/7/ ** ** *** ( ) ( ) ( ) ALAQAR 18/8/ ** ( ) (0.8441) ( ) AMFIRST 3/9/ *** ( ) (0.2665) ( ) ARREIT 13/11/ ** *** ( ) ( ) ( ) ATRIUM 22/7/ *** ( ) (1.1149) ( ) AXREIT 20/4/ *** ( ) (0.6000) (4.6496) BSDREIT 5/8/ *** ( ) (1.1424) ( ) HEKTAR 12/8/ *** ( ) (0.9197) ( ) QCAPITA 1/4/ * *** ( ) (1.6986) ( ) STARREIT 10/4/ *** ( ) (0.5423) (5.4024) TWRREIT 7/3/ *** ( ) (0.3948) ( ) UOAREIT 15/7/ *** ( ) (0.3833) ( ) Noes: Criical values for he LM es a 10%, 5% and 1% significan levels = , , Criical values for oher coefficiens based on sandard disribuion = 1.645, 1.96, * ( ** ) *** denoe saisical significance a he 10%, 5% and 1% levels respecively.

23 22 Table 4: LS es Model C wih a Srucural Break TB k S -1 1 B D Ineres rae 3/10/ ( ) *** (3.0273) (0.3770) *** ( ) KLCI 20/12/ *** *** ( ) (0.7602) ( ) ( ) AHP1 25/6/ ** *** ** ( ) ( ) (3.6852) (2.1753) AHP2 10/3/ ** *** *** ( ) (0.9387) ( ) ( ) ALAQAR 3/9/ *** ( ) (0.2806) ( ) ( ) AMFIRST 26/7/ ** ( ) ( ) (0.4761) ( ) ARREIT 23/6/ *** * ( ) ( ) ( ) (1.9008) ATRIUM 31/10/ ** ( ) (1.3366) (0.8195) ( ) AXREIT 1/6/ *** ( ) ( ) (2.9518) (0.2160) BSDREIT 7/7/ ** *** ( ) (2.4613) ( ) ( ) HEKTAR 18/7/ ( ) ( ) (1.5743) ( ) QCAPITA 3/7/ *** *** ( ) (4.3382) ( ) ( ) STARREIT 10/4/ ** *** * ( ) ( ) (5.2887) (1.7885) TWRREIT 27/7/ ** *** ( ) ( ) (3.3463) (1.5109) UOAREIT 25/6/ ( ) ( ) ( ) (1.2469) Criical values locaion of break, λ % significan level % significan level % significan level Noes: The criical values are symmeric around λ and (1-λ). * ( ** ) *** denoe saisical significance a he 10%, 5% and 1% levels respecively.

24 23 Table 5: Gregory and Hansen Tes for Coinegraion wih a Srucural Break Series Model ADF * k TB Z * TB Z * α TB AHP1 C * 5 14/5/ *** 10/5/ *** 10/5/07 C/T /5/ *** 10/5/ *** 10/5/07 C/S /5/ *** 25/5/ *** 25/5/07 AHP2 C *** 1 28/6/ *** 29/6/ *** 29/6/07 C/T *** 1 28/6/ *** 29/6/ *** 29/6/07 C/S *** 1 2/7/ *** 29/6/ *** 29/6/07 ALAQAR C *** 1 14/8/ *** 18/1/ *** 18/1/07 C/T /8/ *** 28/5/ *** 28/5/07 C/S /9/ *** 24/4/ *** 24/4/08 AMFIRST C /10/ ** 15/10/ * 15/10/07 C/T * 1 15/10/ ** 15/10/ ** 15/10/07 C/S /10/ /10/ /10/07 ARREIT C *** 2 20/11/ *** 5/12/ *** 5/12/08 C/T *** 1 5/12/ *** 5/12/ *** 5/12/08 C/S *** 1 13/6/ *** 14/11/ *** 14/11/08 ATRIUM C /11/ /11/ /11/07 C/T /7/ * 18/7/ /7/07 C/S /3/ /3/ /3/08 AXREIT C /10/ /10/ /10/08 C/T /10/ /10/ /10/08 C/S /9/ /9/ /9/08 BSDREIT C ** 0 1/2/ ** 23/1/ ** 23/1/08 C/T *** 0 30/7/ *** 30/7/ *** 30/7/08 C/S * 0 12/2/ * 5/3/ * 5/3/08 HEKTAR C /6/ * 15/6/ * 15/6/07 C/T /6/ * 15/6/ * 15/6/07 C/S /5/ /5/ /5/07 QCAPITA C *** 6 3/9/ ** 4/9/ * 4/9/07 C/T ** 6 3/9/ ** 10/9/ * 10/9/07 C/S *** 0 13/9/ *** 10/9/ *** 10/9/07 STARREIT C /8/ /9/ /9/07 C/T ** 0 8/2/ * 7/2/ * 7/2/07 C/S /9/ /9/ /9/07 TWRREIT C /7/ /7/ /6/07 C/T *** 0 10/7/ *** 10/7/ ** 10/7/07 C/S ** 0 29/6/ ** 18/6/ ** 18/6/07 UOAREIT C /9/ ** 13/9/ ** 13/9/06 C/T *** 0 13/6/ *** 19/6/ *** 19/6/07 C/S *** 0 11/6/ *** 7/6/ *** 7/6/07 Noe: * ( ** ) ( *** ) denoes saisical significance a he 10(5)(1)% level. Criical values wih m = 2 (excluding inercep) ADF * and Z * Z * α Model 1% 5% 10% 1% 5% 10% C C/T C/S

25 24 Table 6: Granger Causaliy Resuls Series REIT IR SP ECT AHP1 REIT *** *** IR SP * ** AHP2 REIT *** *** IR *** SP * *** ALAQAR REIT *** IR SP *** AMFIRST REIT *** IR *** SP ARREIT REIT *** IR SP *** ATRIUM REIT ** IR *** SP AXREIT REIT *** - IR SP BSDREIT REIT *** IR ** SP HEKTAR REIT *** IR SP QCAPITA REIT ** IR *** SP STARREIT REIT *** IR *** SP TWRREIT REIT *** *** IR SP * UOAREIT REIT ** ** IR ** SP * ( ** ) *** denoe saisical significance a he 10%, 5% and 1% levels respecively.