Cross-Border Capital Flows into Real Estate

Cross-border capital flows into real estate are marked by sharp inequalities among countries. Hypothetically, each country should receive capital flows commensurate with the size of its respective economy or, more accurately, the total size of its investible real estate market. In contrast to this hypothesis, the observed capital flows deviate substantially from this 'naive equilibrium' not only in the short run but persistently throughout economic cycles and long-run economic development trajectories. One of the possible explanations for the long-term aberration from expected values are institutional barriers encompassing a broad range of economic, legal and political risks as well as more intangible cultural factors. This study sets out to empirically test for the existence and significance of these barriers by investigating a unique database comprising real estate flow data and a large number of other economic and property market indicators.Following the above observation, we test for deviations of observed capital flows from expected capital flows using a regression framework. Given that cross-border real estate investment activity in each country should be directly proportional to the size of the investible or institutional-grade stock, and observed activity will be different from hypothesised levels, we investigate the determinants of any deviations we find, focussing on economic development, market transparency, rule of law and cultural factors. Based on earlier empirical studies, we expect that excess cross-border capital flows are driven by high GDP per capita, high real estate market transparency and low barriers to market entry. We expect that all countries 'punching above their weight' achieve high scores on all these factors and vice versa.