Yield Floors, Yield Determination and Yield Harmonisation

Real estate yields have been tightening considerably in the last few years, particularly within Central Europe. Yields are a significant factor concerning total returns, and consequently there has been a series of years showing well above average returns, based on capital growth. It is common now to find markets where property yields are below bond yields. Real estate yields have been driven down by the continued ëwall of moneyí and investor sentiment, over and above any economic fundamentals. Calculating and understanding the fundamentals behind the yield determinants has rarely been attempted even though the construction of models that track the historical variation in property yields improves our understanding of the determinants of yields and provides the basis for their forecasting. Current work in Europe has paid little attention to the empirical investigation of yield movements. A UK study by Tsolacos, Keogh and McGough (1998) modelled yields but the authors identified significant econometric difficulties compared with the modelling of rents and new construction. The US literature has examined this issue in more detail. A number of studies have provided significant insight on the determination of yields and the relative importance of real estate and capital market factors e.g. Sivitanidou and Sivitanides, 1999. Building on past work this paper will be analysing the harmonising impact of the European Union on the main drivers to yields. It will consider the impact of recent major yield shifts in this relationship and consider whether the new position is a sustainable new base for yields or a short term phenomenon.