An Analysis of the Institutional Environment of Asian REITs: The Singapore and Hong Kong Experience

The direct real estate market is seen to be less efficient than the stock market, given its higher transaction costs and lower turnover rates. The liquidity of real estate investment trusts (REITs) has mitigated the inefficient problems of the direct real estate market but it also poses the question of the REITsí efficiency. Efficiency in turn is affected by the institutional environment of different jurisdictions. This paper seeks to investigate the institutional environment pertaining to Singapore and Hong Kong that will affect the ërandom walkí performances of 2 key Asian REITs ñ CapitaMall Trust (CMT) of Singapore and the Link REIT of Hong Kong. The presence of both private and public institutions may well increase the market costs of information flow, non-transparency, higher transaction costs and the cost of capital. Empirical evidence deploying the unit root techniques of the Augmented Dickey-Fuller test and the Phillip-Perron test suggest that the daily closing prices of the 2 REITs of interest follow the random walk behavior, implying weak-form market efficiency. The correlation test and the Granger causality test are conducted on the daily closing prices of CMT and the Link REIT. The 2 REITs are found to have a low correlation, and they do not Granger-cause one another. The random walk behavior is found to be closely linked to the institutional environment of the two countries, specifically in terms of the taxation system, the land system and the REIT (or property trust) guidelines. Some of the more conservative and less flexible government policies have also hindered market efficiency, contributing in part to the random walk behavior of the REIT price indices.