Global investors change the rules
||Ryan, Stephen; Matthew Richardson
||Global investors change the rules
||24th Annual European Real Estate Society Conference in Delft, Netherlands
||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’ RfR - Due to this layer’s objectively lower risks and therefore lower risk premium- Due to different motivation: capital preservation rather than most return per unit of risk- Due 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:a. Reliable liquidityb. Transparencyc. Big lot sizesd. Locations 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: Required return; cross-border; capital flows; risk free rate; AAA.
||Required return; Cross-border; Capital flows; Risk free rate; AAA
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||Real Estate Markets & Economics
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