Liquidity Dynamics between REIT and Property Markets

Abstract

This paper investigates the relationship between the liquidity of the real estate property market and that of the REIT market from the perspective of liquidity dynamics and transformation. Our results indicate that there is a lead-lag relationship between the liquidity of these two markets. The Granger Causality test shows that property market liquidity leads that of the REIT market. In addition, returns in the property market have a causal effect on the liquidity and returns of the REIT market. We estimate VAR models and compute impulse response functions to examine the dynamics of the cross-market relationships in liquidity and return between the two markets. The impulse responses show that REIT liquidity responds to property market liquidity, especially after the structure change in the REIT industry in the early 1990s. Our results also demonstrate that shocks to macroeconomic variables have significant effects on the liquidity of the two markets. Overall, our study sheds light on the contemporaneous commonality between the liquidity of the unsecuritized property market and that of the securitized REIT market.