Institutional Factors and Real Estate Returns: A Cross-Country Study

This chapter provides an empirical study of the relationship between institutional factors and real estate returns. Using data from both developed and emerging market countries, our empirical results show that institutional factors do influence real estate returns and that these factors may not be fully priced. We find that when controlling return volatility and level of economic growth, a higher property return is expected in countries where the economic growth, a higher property return is expected in countries where the economy is more efficient and has more economic freedom. Our results support the view that the combination of "lumpiness" of real estate investment and the volatile nature of international capital flows may expose property investors to extra investors to extra investment risk, which needs to be compensated. Our results also indicate that an improvement in a country's economic efficiency and economic freedom may reduce property variance risk.