The liquidity of a property is the capacity to be able to “immediately exchange a property for cash at current market prices”.

In a liquid market, the published index volatility will match the experience of investors wanting to transact in the market. In a market with low liquidity some investors would have been unable to trade as much as they wanted to, in the desired time frame, at the market prices. This is usually most acute in either very strong or weak markets. Markets with low liquidity are therefore more volatile than the published indices and should demand a higher return premium.

This is similar to an equity market where the published bid-offer spread is for only a certain number of shares; increase the number of shares required and the spread widens for more thinly traded (illiquid) stock. Note that liquidity therefore matters more for larger investors.