Real Estate Company Reactions to Financial Market Regulation

This study investigates the impact of international financial regulation on listed real estate companies. In particular, we look at how three regulatory reforms undertaken in the aftermath of the global financial crisis have affected returns and credit default swap (CDS) spreads of real estate companies. The three reforms are aimed at regulating different segments of the market – Basel III targets banks, and could restrict the availability of bank debt to the sector, the Alternative Investment Fund Management Directive (AIFMD) targets funds, which could increase compliance costs and reduce the potential investor pool, while the European Market Infrastructure Regulation (EMIR) is aimed at derivative trading and could impact the cost of debt capital. We employ an event study methodology using daily financial market data and identify the regulatory events through news in the media. Regulatory event are identified based on news articles in major international financial newspapers and news agencies related to above regulations. The results show that, on average, market participants trading real estate equities and CDSs respond significantly to announcements about Basel III, AIFMD and EMIR, however, we observe differences across the countries the types of companies (large versus small, more leveraged versus less leveraged) and across the regulations. The strongest effects for equity are associated with Basel III and AIFMD. The effects on the credit side are much larger in scale but less frequent. The impact of the regulatory reforms is strongest for UK property companies, large companies and companies with high leverage. Overall, albeit not directly, the performance of listed property companies is significantly affected by news about financial regulatory reforms.