Do cross-border investors benchmark commercial real estate markets? Evidence from relative yields and risk premia for a European investment horizon

Abstract

Purpose

The purpose of this study is to introduce a new perspective on determinants of cross-border investments in commercial real estate, namely, the relative attractiveness of a target market. So far, the literature has analyzed only absolute measures of investment attractiveness as determinants of cross-border investment flows.

Design/methodology/approach

The empirical study uses a classic ordinary least squares estimation for a European panel data set containing 28 cities in 18 countries, with quarterly observations from Q1/2008 to Q3/2018. After controlling for empirically proven explanatory covariates, the model is extended by the new relative measurement based on relative yields/cap rates and relative risk premia. Additionally, the study applies a generalized additive mixed model (GAMM) to investigate a potentially nonlinear relationship.

Findings

The study finds on average a ceteris paribus, statistically significant lagged influence of the proxy for relative attractiveness. Nonetheless, a differentiation is needed; relative risk premia are statistically significant, whereas relative yields are not. Moreover, the GAMM confirms a nonlinear relationship for relative risk premia and cross-border transaction volumes.

Practical implications

The results are of interest for both academia and market participants as a means of explaining cross-border capital flows. The existing knowledge on determinants is expanded by relative market attractiveness, as well as an awareness of nonlinear relationships. Both insights help to comprehend the underlying transaction dynamics in commercial real estate markets.

Originality/value

Whereas the existing body of literature focuses on absolute attractiveness to explain cross-border transaction activity, this study introduces relative attractiveness as an explanatory variable.

Citation

Oertel, C., Willwersch, J. and Cajias, M. (2020), "Do cross-border investors benchmark commercial real estate markets? Evidence from relative yields and risk premia for a European investment horizon", Journal of European Real Estate Research, Vol. 13 No. 1, pp. 83-103. https://doi.org/10.1108/JERER-10-2019-0032