International yield spreads as a determinant of foreign real estate investment activity

Volumes of Foreign Real Estate Investment (FREI) have rapidly grown in many countries over the past decade (Mauck, Price (2017)). Thus, activities of foreign investors become increasingly important for domestic but also globalized real estate markets. So far, literature has quantified the effect of foreign capital on fundamental real estate parameters such as cap rates (see e.g. McAllister, Nanda (2016) and Kim et al. (2018)). Furthermore, researchers identified several determinants of foreign capital flows (see e.g. Lieser, Groh (2014)). However, the literature entails a gap if and to which extent differences in international cap rates (so-called yield spreads) affect foreign investors. Consequently, the functional relationship between the foreign investors’ calculus and international yield spreads is the fundamental research aim of the present study.This paper will utilize insights from real estate literature for national markets, which identified domestic yield spreads as a decisive factor to determine capital inflows into an asset class (Laposa, Mueller (2017)). The analysis will assess whether this national mechanism can also be observed on an international level by focusing on the United States (US) as the target country for foreign real estate investments. Thus, the empirical study will isolate the effect of international yield spreads on foreign inflows into commercial real estate in the US. These spreads are calculated as the difference between US yields and yields in several foreign markets (e.g. Germany, the United Kingdom, France, and others, which showed high investment activity in the US in the past). Hence, the central hypothesis states that positive spreads trigger inflows and consequently increase the transaction volumes of foreign investment. The latter will be tested by using regression models. These include time series analysis such as OLS as well as logistic models and Markov-Switching, following the existing literature methodically (see Tsolacos et al. (2014) as well as Laposa, Mueller (2017)), but also expanding it by including spreads as explanatory variables.To the best of the author's knowledge, there is no study, which investigates international yield spreads as a determinant for foreign real estate investment. Therefore, the paper will improve the understanding of investors’ calculus and contribute to the body of literature by shedding light on the impact of international yield spreads on foreign investment activity.