Foreign investors’ influence on the real estate market capitalization rate – evidence from a small open economy

ABSTRACT

This article adds to the scarce literature on the influence of international investment flows on local real estate values. We hypothesize that a greater foreign-investor presence in a real estate market results in a lower capitalization rate and examine whether this holds true in the Helsinki CBD office market in Finland. This market provides an interesting case study by being part of a small open economy, in which the presence of foreign investors has substantially varied over time. The Dynamic OLS estimations using data for the period 1990–2015 provide support for the hypothesis. The baseline results show a highly statistically significant negative impact of foreign-investor participation on the capitalization rate, the point estimates indicating that a 10% point growth in the share of foreign buyers of the total transaction volume decreases the cap rate by approximately 30 basis points.

KEYWORDS:

• Real estate investment
• capitalization rate
• foreign investment
• dynamic ordinary least squares

JEL CLASSIFICATION:

• E22
• F65
• R33

Acknowledgements

We are grateful to two anonymous referees for many helpful comments and for Catella Property Ltd. and KTI Finland for providing us with data. This research (the first author) was supported by the Academy of Finland [decision number 268310].

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ This variable can contain information on the expected overall economic growth, too.

² In a simple OLS regression, the two variables together explain 80% of the time variation in the RAKLI-KTI forecast series.

³ After the inclusion of f, some parameter signs change and there are some substantial changes in the significance of parameters. This is not surprising, as in the presence of substantial multicollinearity, adding or removing one variable can cause notable changes in individual parameter estimates. The same applies to corresponding changes in parameter estimates within and between Tables 4 and 6.

⁴ The residual series that we refer to in the text are those from the ‘long-term’ equations in levels. That is, they do not include the influence of the leads and lags in differences.

⁵ OECD (2015).

⁶ We thank an anonymous referee for pointing out the desirability of controlling for exchange rate movements. The Finnish currency was Finnish Mark until 2000:2, and Euro since that. The Finnish mark was tied to Euro with a fixed rate since 1999:1.

⁷ For the Euro area, there is no long enough series for the risk premium. Hence, we use the US series. The risk premium is measured as the difference between Moody’s Baa rated bond yield and the 3-month T-bill rate. Chervachidze and Wheaton (2013) use a similar measure to proxy general risk premium in the economy.

⁸ We are thankful to an anonymous referee for pointing out these facts.