Journal of Real Estate Finance and Economics, 15:1, 11±26 (1997)
# 1997 Kluwer Academic Publishers
Interactions Between Property and Equity Markets:
An Investigation of Linkages in the United Kingdom
Department of Land Management and Development, Faculty of Urban and Regional Studies,
University of Reading, Reading, U.K.
Faculty of Economics, University of Cambridge and Fellow of Trinity College, Cambridge
Two strands of real estate researchÐthat concerned with the relationships between securitized real estate and the
underlying market and that dealing with the role of property in the wider economyÐrarely are considered
together. The paper utilizes the U.K. equity market and property company share data to explore the relationships
between real estate and the rest of the economy, using a two-sector analytic model. Causality analysis suggests
that the wider economy leads the real estate market in the short term but that, with a longer lag structure, positive
real estate returns may point to negative future returns in the rest of the economy. This provides weak
con®rmatory evidence for theories of capital switching between sectors.
Key Words: property companies, REITs, equities, capital switching, causality testing
This paper attempts to draw together two strands of real estate research. The ®rst strand
involves examination of the behavior of security-backed property vehicles (in particular
property company or real estate investment trust shares) in relation to the overall equity
market and the underlying direct real estate investment market. The second strand seeks to
analyze the role and signi®cance of commercial property in the overall economy. Our
analyses focus on the U.K. market; however, the techniques employed may be applied to
other markets to provide comparative insights.
We argue that, in the long term, the performance of property company shares must
re¯ect the performance of the underlying real estate market (in that net asset values and
cash ¯ow re¯ect changing capital values and rent levels). In the same way, the
performance of equities (with the impact of property companies removed) must re¯ect
underlying corporate performance. Accordingly, an exploration of the interrelationship
between property company performance and ``other equity'' performance should shed
light on the causal relationships between the two underlying markets.
In common with parallel studies of the relationships between real estate investment
trusts (REITs), share markets, and appraisal-based indices, we attempt to separate out real