Nowhere to hide: an analysis of investment opportunities in listed property markets during financial market crises

Abstract

The effects of financial crises in listed property markets have left investors looking for safe havens through diversification. This is the largest study to date of the effect of crises on diversification opportunities in the listed property context, spanning 12 markets. Our study covers the Asian market crisis and the current global credit crisis. A critical contribution our work makes is the inclusion in our modelling of the potential for currency effects to impact the diversification environment. We observed that diversification benefits evaporated during the crisis in both hedged and un‐hedged cases. Perhaps a surprising result given the magnitude of the currency effects experienced during the Asian crisis. Interestingly, although diversification benefits vanish during the crisis in both hedged and un‐hedged cases, the markets that are significant in the model differ between the two cases. The methodology we have employed represents a very flexible, dynamic, and realistic modelling approach to the data at hand. Our implementation uses a specific class of Vector Autoregression (VAR) models (Zero‐Non‐Zero coefficient VAR models) that have a particular advantage in dealing with data for which we believe that certain coefficients should automatically be zero (as a result of structural features of the markets involved), and our approach is a ‘full system’ approach that allows for cointegration between markets.

Keywords:

• diversification
• listed property
• financial crisis
• vector autoregression

Acknowledgements

I would like to thank Terry O'Neill, Michael Martin and Deane Terrell for useful comments and suggestions. This research was supported by ARACH Linkage Grant LP0562008 and the partner organisation, Australian Prudential Regulation Authority (APRA).