<abstract xmlns="http://www.w3.org/1999/xhtml"><p>We conduct an exploratory analysis using proxy measures of cross-sectional returns and rental yields in residential real estate. Asset pricing models predict that expected returns should exhibit some sensitivity to one or several fundamental variables that represent a common source of undiversifiable risk. Residential real estate, just like works of art and collectibles, is unique because it represents both an investment vehicle and a durable consumption good. Its pricing and returns should thus reflect both the benefits from portfolio diversification and the effect of supply and demand. In this paper, we investigate the variation in proxy returns and proxy rental yields across 34 major European cities, using a handful of independent variables that should account for the influence of market risk, inflation, and liquidity. In spite of obvious limitations stemming from our sample, we find that the explanatory power of our model is unusually high for a cross-sectional data analysis. Some of our findings concur with other studies showing that in spite of strong segmentation, real estate markets respond to the same structural risk factors. A good portion of our results, however, is hard to explain and interpret. Either we need to take into account cultural differences between Eastern and Western Europe as part of a behavioral approach, or we have to concede that we have been misled by the mismatch in the level of aggregation and the crude estimation of the dependent variables.</p></abstract>

We conduct an exploratory analysis using proxy measures of cross-sectional returns and rental yields in residential real estate. Asset pricing models predict that expected returns should exhibit some sensitivity to one or several fundamental variables that represent a common source of undiversifiable risk. Residential real estate, just like works of art and collectibles, is unique because it represents both an investment vehicle and a durable consumption good. Its pricing and returns should thus reflect both the benefits from portfolio diversification and the effect of supply and demand. In this paper, we investigate the variation in proxy returns and proxy rental yields across 34 major European cities, using a handful of independent variables that should account for the influence of market risk, inflation, and liquidity. In spite of obvious limitations stemming from our sample, we find that the explanatory power of our model is unusually high for a cross-sectional data analysis. Some of our findings concur with other studies showing that in spite of strong segmentation, real estate markets respond to the same structural risk factors. A good portion of our results, however, is hard to explain and interpret. Either we need to take into account cultural differences between Eastern and Western Europe as part of a behavioral approach, or we have to concede that we have been misled by the mismatch in the level of aggregation and the crude estimation of the dependent variables.

Residential Real Estate in Europe: An Exploration of Common Risk Factors

Faculty of Business and Administration, University of Bucharest

Williams School of Business, Bishop’s University

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Residential Real Estate in Europe: An Exploration of Common Risk Factors"}

We conduct an exploratory analysis using proxy measures of cross-sectional returns and rental yields in residential real estate. Asset pricing models predict...

Residential Real Estate in Europe: An Exploration of Common Risk Factors

Publié en ligne: 30 déc. 2015

Pages: 413 - 429

Reçu: 02 juin 2015

Accepté: 24 nov. 2015

DOI: https://doi.org/10.1515/revecp-2015-0028

Mots clés
Residential real estate, returns, yields, behavior economics, Eastern Europe

© 2015 Elena Druica et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Residential Real Estate in Europe: An Exploration of Common Risk Factors

Publié en ligne: 30 déc. 2015

Pages: 413 - 429

Reçu: 02 juin 2015

Accepté: 24 nov. 2015

DOI: https://doi.org/10.1515/revecp-2015-0028

Mots clésResidential real estate, returns, yields, behavior economics, Eastern Europe

© 2015 Elena Druica et al., published by De Gruyter Open

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Mots clés
Residential real estate, returns, yields, behavior economics, Eastern Europe