How Do Institutional Factors Affect International Real Estate Returns?

Robert Edelstein, Wenlan Qian and Desmond Tsang

Online First™, 5 April 2010

Abstract

Prior international real estate studies recognize the importance of country-specific factors for explaining real estate security returns. Using firm level observations from the FTSE NAREIT/EPRA Index for 2004–2006, we construct a set of multifactor multivariate statistical regression models to identify and pin-point country-specific institutional features that determine differences for excess real estate security returns. Our analyses indicate that the excess real estate returns (i.e., required risk premiums) are, in part, determined by the quality of a country’s legal system and the corporate governance environment, controlling for various country-specific macro-economic variables and firm-level characteristics. We further find that the impact of institutional factors on international real estate returns is more prominent in the Asia-Pacific Region, and recent development of the REIT structure across the world does not alter the importance of corporate governance and legal system quality for determining real estate returns.

Keywords  International real estate returns – REITs – Corporate governance – Legal environment – Accounting standards – Country risks

JEL Classification  F36 – F21 – G15


We would like to thank the FTSE Group for providing us with the FTSE/EPRA Global Real Estate Index data. We thank Andy Naranjo, Melina Petrova, an anonymous referee, seminar participants at AREUEA San Francisco annual meeting, AsRES Shanghai annual meeting, and DePaul University, and our editor Jim Shilling for helpful comments and suggestions. We would also like to thank Danny Lasry and Lawrence Cohen for their research assistances. Tsang acknowledges financial support from McGill University. Edelstein acknowledges support from the University of California at Berkeley. Qian would like to acknowledge the generous support of Institute of Real Estate Studies and the Risk Management Institute at National University of Singapore.

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