Essay Example on Real Estate Sec. Market: 20 Yrs of Growth & Risk Impact

Market risk refers to the possibility of experiencing losses as an investor because of some factors which affect the overall financial market performance. Therefore, the market risk effect might have no effect, positive effect, or negative effect on the real estate in stock prices in different countries. In the last two decades, the securities market of the world real estate securities has developed slowly. In comparing them with the private markets, the growth in the public market has given the investors the chance of constructing portfolios of commercial real estate even without the burden of managing, acquiring, or even disposing of the properties which are in other countries (Al Bakri, 2014 p.71-72).

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The UAE government mainly depend on oil. However, it has recently endorsed policies in diversifying the economy, and the two main sectors that have been selected include the real estate sector and tourism sector. The real estate sector has played an essential role in enhancing the economic performance of the country. According to Al Bakri (2014 p.69), the higher the negative movement of stock prices, the higher the risk that occurs in any investment and real estate is not excluded, and vice versa. Also, if the stock prices of the real estate firms move in the opposite direction with the market trend, then it means that stocks are correlated to the market negatively.

In a growing economy, the real estate and the stock market usually do well. Factors like high employment, cut in the interest rates and taxes, increased corporate profits, and political stability can result in increased stock values. However, market risks can include financial crisis, global financial crisis, and high costs. Moreover, in every sector, financial ratios are a significant tool that helps in analyzing the performance of a company. The reason is that they help in predicting bond yields, financial risks, and stock prices. Also, it is usually believed that asset prices react perceptively to economic news. Since the stock prices quickly respond to the different sectors in the economy. In the study conducted by Al-Malkawi and Pillai (2013 p.115) on the effect of the financial crisis on the real estate on UAE, it found out that there is a negative influence of a business cycle on real estate firms' performance in the UAE. It also found out that after the financial crisis which had occurred, there was a significant fall in leverage, activity ratios, profitability, and liquidity.

There are several market risks that can affect the real estate stock prices in any given country. A global financial crisis is one of the market risks that affected almost every country economically. However, there is no evidence that it had an impact on the real estate sector of any given country. In a study conducted by Al-Mohana and Hatemi-J (2016, p.416), in exploring the effect of the crisis of real estate on the real estate market of UAE before and after the Global Financial Crisis (GFC), they found out that UAE's real estate market has no impact on the global real estate market. Further, the study investigated the movement of the price index of both the world stock and real estate and found out that the stock price indexes of the world do not have a negative influence on the stock price index of UAE real estate in any conventional significance level. It also means that the price of the world's real estate does not have an impact on the stock price index of UAE real estate.

Financial characteristics of stocks and direct real estate have highly intrigued the investors and homebuyers (Lin and Fuerst, 2014 p.1323). Stock as an investment has low transaction costs and high liquidity while real estate is regarded as a bulky asset which has high transaction costs and low liquidity. Even though there is little research which exists in investigating the long-term association of real estate markets and stock, the study conducted by Lin and Fuerst (2014) investigated the relationship by looking at Asian nations from 1980 to 2012. The study found out the stock market of Asian countries including Taiwan is linearly cointegrated with real estate market (direct) while it is fractionally integrated in Hong Kong and Singapore (Lin and Fuerst, 2014). The integration of property markets and stock is mainly found in the areas which are densely populated. Therefore, in Asian countries, the real estate market co-move with the stock markets.

The main factors that affect the risks related to real estate stocks include market conditions, interest rates, capital structure, and book to market value (Al-Malkawi and Pillai, 2013 p.118). In a study conducted by Liu et al. (1990), in examining the integration of stock market and real estate market, the authors found out that indirect barriers including quality of information, cost, and amount are the main sources of segmentation because they found that (Real Estate Investment Trust) REITs is mainly segmented from stock market. However, the study was unclear on whether the real estate market is integrated with the stock market and if the segmentation is due to the legal constraints or indirect barriers.

Reference List

Al Bakri, A., 2014. Portfolio Diversification Strategy and the Impacts on the Middle East Real Estate Investment Decision. International Journal of Economics and Finance, 6(2), p.62.

Al-Malkawi, H.A.N. and Pillai, R., 2013. The impact of financial crisis on UAE real estate and construction sector: analysis and implications. Humanomics, 29(2), pp.115-135.

Al-Mohana, S., & Hatemi-J, A. (2016). The Impact of Recent Crisis on the Real Estate Market on the UAE: Evidence from Asymmetric Methods. Economia Internazionale/International Economics, 69(4), 389-428.

Lin, P.T. and Fuerst, F., 2014. The integration of direct real estate and stock markets in Asia. Applied Economics, 46(12), pp.1323-1334.

Liu, C.H., Hartzell, D.J., Greig, W. and Grissom, T.V., 1990. The integration of the real estate market and the stock market: some preliminary evidence. The Journal of Real Estate Finance and Economics, 3(3), pp.261-282.