A Gravity Model of Cross-Border Real Estate Development Flows

This paper investigates the scale and drivers of cross-border real estate development in western Europe and central and eastern Europe (CEE). Drawing upon existing literature on the integration of international real estate markets, we make some inferences on expected patterns of cross-border real estate development flows and use a transaction database to assess these flows. A range of economic and real estate variables are explored in this analysis. Whilst western European markets tend to be dominated by local developers, much higher levels of market penetration by international real estate developers are found in the less mature markets of central and eastern Europe. Our modeling approach is two-pronged: explaining volume of development flow as well as probability of any development flow taking place between two countries. Empirical modeling based on Poisson pseudo-maximum likelihood and Poisson-logit maximum-likelihood hurdle model specifications reveal the importance of size of the economies, distance between countries, extent of globalization and EU membership as significant determinants of cross-border real estate development flow. These results are strongly robust across a number of model specifications and samples.