This chapter contains the general background and motivation about the purpose of the paper, the research method and scope, and the research overview; that is, the research structure and process.
1.1 General Background and Motivation
1.1.1 General Background
In the United States, real estate securitization is flourishing in its financial system, especially in real estate investment trust (REITs), and there are lots of academic investigations about it. In Asia, Japan’s real estate investment trust is developing steadily; therefore, scholars often choose the United States and Japan as the reference sample when exploring the topic of REITs. In Taiwan, it has been five years since the first real estate investment trust “Fubon No.1” was launched in 2005, but over the past few years, most of the studies about Taiwan real estate investment trust (T-REITs) are focused on legal system, institutional framework and questionnaire surveys. There is still lack of discussion about the actual performance of T-REITs market. From an investment perspective, the price volatility and returns of REITs are the main factors that affect the investors’ willingness, and the changes of price and returns are related to the interaction with other economic markets. However, only a small number of studies discuss the actual performance in T-REITs, and only a few explore the risk measurement, feasibility, and portfolio investments. Thus, it is necessary and important to study the performance of T-REITs.
In the past, people discuss the relationship between real estate prices and macroeconomic variables, but due to the non-mobility and heterogeneity of real estate, the securities products with better liquidity were developed. Because the United States has developed REITs earlier, there are many studies between REITs and macroeconomic variables coming from them. For instance, Clayton and Mackinnon (2003) imply that NAREIT returns and risks should be related to macroeconomic variables that effect bond returns such as stock price, but the effects from stock price became weaker after 1980. The dramatic growth and maturation of the REITs sector since 1992 led to claims that the link between REITs prices and real estate market
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fundamentals had become much stronger and made REITs more like real estate.
Chatrath and Liang (1998) make a case for an investigation into the possibility of fractional cointegration between REITs and general price levels to test if REITs can act as inflation hedging goods. In Taiwan, there is still lack of studies between T-REITs and macroeconomy, and as a substitute product for physical real estate, the relationship between T-REITs and real estate market needs to be discussed. In addition, the past studies can’t tell the long-run relationship between T-REITs, macroeconomy and commercial real estate market due to time restriction, and it is also important to know whether the lead/lag relationship exists between T-REITs and other economic variables. For real estate market, most of the studies use construction index rather than actual prices or rents as a proxy for real estate market, and it has room for further debate. To deeply understand the performance of T-REITs, there is a need to study the relationship between T-REIT, macroeconomy and commercial real estate markets.
To sum up, this study tries to explore the long-run and short-run relationship between T-REIT, macroeconomy and commercial real estate markets, and to examine the causality between T-REITs and economic variables.
1.1.2 Research Motivation
From the first launch in March 2005 to December 2008, there are 8 T-REITs on the market in Taiwan. This study attempts to explore the long-run and short-run relationship between T-REIT, macroeconomy and commercial real estate markets within this period. This study intends to discuss the following issues;
(1) To examine whether if there is long-run equilibrium relationship among T-REITs, macroeconomy and commercial real estate markets.
(2) To explore the short-run relationship between T-REITs, macroeconomy and real estate variables.
(3) To examine the lead/lag relationship between T-REITs, macroeconomy and real estate variables.
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1.2 Research Method and Scope
1.2.1 Research Method
(1) Theory and Literature Review
The first step is to clarify the macroeconomic variables and real estate market factors that will affect the REITs volatility. We can find the factors that will affect REITs prices, and understand the long-run and short-run relationship between REITs and factors from the past relevant literatures. These theories and findings will be the basis of this study.
(2) Modeling and Empirical Analysis
The Johansen cointegration method is applied to explore the long-run equilibrium relationship between T-REITs and potential factors. If cointegration relationship exists, we then employ vector error correction model (VECM) to estimate the short-term effect; if cointegration does not exist, then we use vector autoregression model (VAR) to estimate the short-term effect. Finally, we will apply Granger causality to test the lead/lag relationship between T-REITs and variables.
1.2.2 Research Scope (1) Time Scope
This study collected data from the launched date. The study period ranges from March 2005 to December 2008.
(2) Spatial Extent
Currently, most investment objects of T-REITs are located in Taipei1, therefore the commercial rents and prices discussed in this study are properties in Taipei.
(3) Research Objects
This study tries to explore the relationship between T-REITs and different economic variables, and the variables are divided into macroeconomic variables and the real estate market variables. The current T-REITs investments contain commercial
1 In all the 8 T-REITs components, there are only one object in Taipei county and one in Tainan city.
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buildings, department stores, markets and hotels, but the mainly components are commercial buildings, so this study addresses only the commercial real estate markets.
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1.3 Research Overview
1.3.1 Research Framework
This study is divided into five chapters. The first chapter is introduction, which contains the general background, motivation and research overview. The second chapter is literature review, mainly discussing the relationship between T-REITs and other variables. The third chapter is research method, establishing long-run and short-run relationship discussion models, and using the empirical data to establish the T-REITs index. The fourth chapter is the empirical studies and results, analyzing the results of the models and discussing the degree of influence among the various variables. The final chapter is the conclusions and discussion, summarizing the preceding chapters and proposing recommendations for follow-up researches.
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1.3.2 Research Process
Figure 1-1 The research process