The Integration of European and US Real Estate Markets

A key reason for US capital looking for investment opportunities in Europe and European capital in the US is diversification that is exposure to different economic real estate market cycles. Indeed investors seek to exploit diverse economic trends, country characteristics and property market contexts. On the other hand it can be argued that investment markets are getting more interlinked and integrated through financial market integration. This paper examines the integration of the European and US markets. In the existing literature integration is examined with a range of naÔve and more sophisticated methodologies. In the existing literature, the integration of securitised real estate markets globally has attracted more research interest given the greater availability of data in this segment of the property investment market. This paper looks at both direct and indirect real estate indices and offers useful comparisons mostly in the office sector. The focus of this paper is the long-run relationship of the US and European markets. It provides evidence on whether real estate returns form a stable cointegration relationship and estimates long-run elasticities. A stable cointegration relationship is followed by the estimation of an error correction representation. The paper illustrates the impact of long-run shocks through impulse response functions and variance decompositions. Undoubtedly investors are keen on empirical evidence in the response of European markets to shocks in US real estate markets and vice versa.