Price, risk and volatility in European real estate markets

In the light of continued financial and economic turmoil, there has been a marked increase in the volatility in real estate markets. This is impacting on the pricing of property assets, partly through market sentiment, particularly concerning risk. In a downturn, the perception of investment risk becomes increasingly important relative to overall total returns, and thus impacts on yields and performance of assets. This paper specifically considers the modelling of property pricing within this economic environment. The theoretical context begins by analysing the relationship between property yields and government bonds, incorporating expectations for property market performance. The analytical context then moves on to specifically include a measurement of risk which stresses its growing importance in real estate market. The model thus incorporates macroeconomic and real estate data, together with an international risk multiplier, which is calculated within the paper. From this, the paper considers the impact of the globalisation of financial and investment markets on the real estate industry. In particular the analysis looks at which markets have been most impacted by globalisation including the magnitude of that impact on real estate prices and volatility. The outcome of the paper provides important insights into what is driving the yield movements in different markets