Global investors change the rules

Stephen Ryan and Matthew Richardson

ERES from European Real Estate Society (ERES)

Abstract: Increasing cross-border capital flows are inevitably leading to greater global integration in commercial real estate. But integration is not happening at every level in every market. The largest cross-border investors focus on one layer of the market only.This layer of the market be priced differently, for some or all of these reasons:Due to investors’ risk free rate (RfR) being different to local investors’ RfRDue to this layer’s objectively lower risks and therefore lower risk premiumDue to different motivation: capital preservation rather than most return per unit of riskDue to different risk sensitivity (more attuned to political risk, less concerned with volatility)Due to Merton’s investor recognition hypothesisThe characteristics of this market layer are:Reliable liquidityTransparencyBig lot sizesLocations with recognised brandsA key issue is the effect of this trend (towards global integration) on market pricing, which we will quantify.Bond investors might call this layer triple AAA; equity investors might call it blue chip; real estate does not yet have a corresponding label.The trend has implications for indices, valuation (potentially), asset allocation and market structure.

Keywords: AAA; Capital flows; Cross-border; Required return; Risk free rate (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2017-07-01
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