Money supply, exchange rates and office market dynamics: comparative evidence from the UK and Germany

PurposeThe aim of this study is to shed light on the relative importance of money supply and exchange rates variations on office markets prices dynamics.Design/methodology/approachUsing a parsimonious real estate asset pricing model, the authors focus on the two biggest European office markets; namely the United Kingdom and Germany. The authors use a panel approach based on a robust econometric methodology (GMM with correction errors-in-variables). The authors take into account the variations of exchange rates and money supplies for the most important currencies.FindingsThe results highlight the impact of money supplies and exchange rates on office prices after the Global Financial Crisis. The authors report that the monetary policies in the UK and in Germany (Euro zone) have had significant influences in the real estate sector after the Global Financial Crisis. However, the authors identified significant differences between British and German office markets for the 2009–2019 period regarding the impact of money supply and exchange rates variations on the office prices dynamics.Practical implicationsThe results highlight the impact of money supplies and exchange rates on office prices after the Global Financial Crisis. The detailed and exclusive database (composed of the main office markets in the United Kingdom and in Germany) allows the authors to identify significant differences and opportunities for investors.Originality/valueThe authors use a parsimonious model and apply a panel approach based on a robust econometric methodology to analyse the impact of exchange rates and money supply variations on the office prices dynamics. The detailed and exclusive database (composed of the main office markets in the United Kingdom and in Germany) allows the authors to identify significant differences for investors.

Real estate risk, yield modelling and market sentiment: the impact on pricing in European office markets

PurposeThe financial and economic turmoil that resulted from the Global Financial Crisis (GFC), included a marked increase in the volatility in real estate markets. Property asset prices were impacted by the real economy and market sentiment, particularly concerning the determination of risk. In an economic downturn, the perception of investment risk becomes increasingly important relative to overall total returns, and thus impacts on yields and performance of assets. In a recovery phase, and particularly within an environment of historically low government bonds, risk and return compete for importance. The aim of this paper is to assess the interrelationships and impacts on pricing between real estate risk, yield modelling outcomes and market sentiment in selective European city office markets.Design/methodology/approachThis paper specifically considers the modelling of commercial property pricing in relation to the appetite for risk in the financial markets. The paper expands on previous work by determining a specific measure of risk pricing in relationship to changing financial market sentiment. The methodology underpinning the research specifically examines the scope for using national and international risk pricing within specific real estate markets in Europe.FindingsThis paper addresses whether there is a difference between the impact of risk on the pricing of real estate in international versus regional cities in Europe. The analysis, therefore, determines which city centre office markets in Europe have been most impacted by globalisation including the magnitude on real estate prices and market volatility. The outcome of the paper provides important insights into how changes in risk preferences in the international capital markets have driven and continues to drive yield movements under different market conditions.Research limitations/implicationsThe paper considers the driving forces which have led to the volatile movements of yields, emanating from the GFC.Practical implicationsThis paper considers the property market effects on pricing of commercial real estate and the drivers in selected European cities.Originality/valueThe outcome of the paper provides important insights into how changes in risk preferences in the international capital markets have driven and continue to drive the yield movements in different real estate markets in Europe.

Capital flows and office markets in major global cities

PurposeOffice markets and particularly international financial centres over the past decade have experienced rapid financialisation, developments and indeed changes in the post-global financial crisis (GFC) landscape. Importantly, the volume and types of international capital flows have witnessed more foreign actors and vehicles entering into the investment landscape with the concentration of investment intensifying within key financial centres. This paper examines the interaction of international real estate capital flows in the London, New York and Tokyo office markets between 2007 and 2017.Design/methodology/approachUsing Real Capital Analytics (RCA) data comprising over 5,700 office property transactions equating to $563bn between 2007 and 2017, the direct global capital flows into the London, New York and Tokyo office markets are assessed using an autoregressive distributed lag (ARDL) approach. Further, Granger causality tests are examined to analyse the short-run interaction of international real estate capital flows into these three major office markets.FindingsBy assessing the relativity of internal to external investments in these three central business district (CBD) office markets, differences in market dynamics are highlighted. The London office market is shown to be highly dependent on international flows and the USA, the foremost source of cross-border investment on the global stage. The cointegration and causality analysis indicate that cross-border real estate investment flows in these markets (and financial centres) show both long- and short-run relationships and suggest that the London office market remains more distinct and the most reliant on international capital flows with a wider geographical spread of investment activities and investor types. In the case of New York and Tokyo, these markets appear to be driven by more domestic investment activity and capital seemingly due to subtle factors pertaining to investor home bias, risk aversion and diversification strategies between the markets in the aftermath of the GFC.Originality/valueGiven the importance of the CBD offices in London, New York and Tokyo as an asset class for institutional investors, this paper provides some insights as to their level of connection and the interaction of the international capital flows into these three major cities.

How does liquidity in the financial market affect the real estate market yields?

PurposeAfter the Global Financial Crisis in 2008, the impact of expanded liquidity in the financial market has drawn attention. The purpose of this paper is to examine the relationship between liquidity in financial markets and office markets across Asian countries. In particular, the research not only examines the effect of normal liquidity on real estate markets, but also the effects of excess liquidity are specifically highlighted.Design/methodology/approachThis paper uses panel estimation utilizing quarterly data from the first quarter of 2007 to the fourth quarter of 2015. Taking both time and location dimensions into account allows for a more precise estimate of the relationship between liquidity and office market’s yields.FindingsPer the empirical outcome, an increasing excess liquidity tends to decelerate the value of office yields in six major Asian office market centers due to the positive effect on commercial real estate value. This effect is also identified by comparing the difference between the level of fitted yields and actual yields.Practical implicationsThe results enhance the understanding of commercial real estate yield determinants. Furthermore, the results can be used to assess the impacts of liquidity on major office markets in Asia.Originality/valueThis paper attempts to uncover the impact of liquidity in financial markets on the office market yields. To better understand the relationship, the concept of excess liquidity is adopted and further exploration of each office market is conducted by comparing the fitted yields, which is computed considering the effects of excess liquidity on yield levels and actual yields.