Cross-Border Capital Flows into Real Estate

Abstract

This study investigates the factors that determine the volume of cross-border capital flows into direct real estate markets. In particular, we seek to establish whether existing institutional and regulatory barriers are negatively associated with the average level of cross-border real estate flows into and out of a set of 25 countries. We do not find evidence for cross-border institutional or regulatory arbitrage on the real estate market. Except credit and financial market development, hardly any other institutional and legal barriers impact significantly on the level of real estate inflows. However, the presence of institutional and legal barriers in the domestic country can hinder real estate outflows. Domestic investors are highly dependent on the domestic financial market and on debt financing from the capital markets in general. More transparent credit information serves as a catalyst of cross-border real estate investment activity. Finally, both foreign and domestic inflows are positively linked to property returns in the same year but the volume of foreign flows is generally found to be more reactive to return shocks.