The joint dynamics of European office yields

We examine office yield behaviour in key European cities which account for the bulk of investment transactions in Europe. A number of studies investigate the cross sectional influences on real estate yields identifying factors which drive the geographical variation of yields. These studies also highlight global factors driving yields in addition to geography specific influences. Research work using time-series data ascertain the impact of dynamic drivers of yields such as the business cycle and yields in alternative asset classes. This study examines the response of yields to dynamic influences that reflect changing macroeconomic and investment conditions. We explicitly examine the relevance of investor sentiment in yield movements by including both direct and indirect measures. The empirical investigation extends to include the ‘flight-to-quality/liquidity” phenomenon in bond and real estate markets. We pool the European office yield data provided by BNP Paribas and opt for a panel VAR (PVAR). This framework allows interaction among variables but also across cities. We study whether yield changes are contemporaneous or some cities move first. Given that the cities in the sample are heterogeneous the PVAR allows for individual heterogeneity by introducing fixed effects. A useful extension of this methodology is to study shocks and their impact across cities such as the response of city office yields to political uncertainties in various parts of Europe.