Abstract
Property is a significant asset in the balance sheets of some Singapore industrial/commerce firms and hotel corporations. In this research, we take on the task of examining the relationship between real estate and stock market valuation of these business firms from an asset pricing perspective. Specifically, the real estate sensitivity of ‘property‐intensive’, non‐real estate stocks is investigated in both a three‐index (market, sector and property) of stock returns and in an arbitrage pricing theory (APT) framework. The APT model is further recast as a multivariate non‐linear regression model with across‐equation restrictions. Using weekly returns on ‘property‐intensive’ stocks in the period 1989–1998 and three shorter‐sample periods, iterated non‐linear seemingly regression techniques (ITNSUR) are employed to obtain joint estimates of stock sensitivities and their associated APT risk ‘prices’. The ‘real estate’ sensitivity is found to be systematic and priced in the APT sense of corporations being paid an ex ante premium for bearing property market risk in investing and owning properties in two of the three sample periods (1989–1991, 1992–1994). The empirical results provide some support that property is a factor in corporate valuation, and is broadly consistent with the efficient markets hypothesis. The implications for portfolio and corporate management are examined. Copyright © 2001 John Wiley & Sons, Ltd.