Capital flows and office markets in major global cities
| DOI | https://doi.org/10.1108/JPIF-02-2020-0023 |
| Published date | 21 July 2020 |
| Date | 21 July 2020 |
| Pages | 298-322 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Olawumi Fadeyi,Stanley McGreal,Michael McCord,Jim Berry |
Capital flows and office markets in
major global cities
Olawumi Fadeyi, Stanley McGreal, Michael McCord and Jim Berry
School of Built Environment, University of Ulster, Belfast, UK
Abstract
Purpose –Office markets and particularly international financial centres over the past decade have
experienced rapid financialisation, developments and indeed changes in the post-global financial crisis (GFC)
landscape. Importantly, the volume and types of international capital flows have witnessed more foreign actors
and vehicles entering into the investment landscape with the concentration of investment intensifying within
key financial centres. This paper examines the interaction of international real estate capital flows in the
London, New York and Tokyo office markets between 2007 and 2017.
Design/methodology/approach –Using Real Capital Analytics (RCA) data comprising over 5,700 office
property transactions equating to $563bn between 2007 and 2017, the direct global capital flows into the
London, New York and Tokyo office markets are assessed using an autoregressive distributed lag (ARDL)
approach. Further, Granger causality tests are examined to analyse the short-run interaction of international
real estate capital flows into these three major office markets.
Findings –By assessing the relativity of internal to external investments in these three central business
district (CBD) office markets, differences in market dynamics are highlighted. The London office market is
shown to be highly dependent on international flows and the USA, the foremost source of cross-border
investment on the global stage. The cointegration and causality analysis indicate that cross-border real estate
investment flows in these markets (and financial centres) show both long- and short-run relationships and
suggest that the London office market remainsmore distinct and the most reliant on international capital flows
with a wider geographical spread of investment activities and investor types. In the case of New York and
Tokyo, these markets appear to be driven by more domestic investment activity and capital seemingly due to
subtle factors pertaining to investor home bias, risk aversion and diversification strategies between the
markets in the aftermath of the GFC.
Originality/value –Given the importance of the CBD offices in London, New York and Tokyo as an asset
class for institutional investors, this paper provides some insights as to their level of connection and the
interaction of the international capital flows into these three major cities.
Keywords Office market, Global cities, International investments, Granger causality, Auto-regressive
distributed lag approach (ARDL), Cointegration
Paper type Research paper
Introduction
In an expanding era of economic globalisation, the scope and nature of international capital
flows are maturing with its active presence visible across all markets. Indeed, since the 1990s,
international financialisation, foreign investment and capital movements have played an
important role in many market crises due to risk in relation to their super liquidity and
speculation (Cai, 2018). As a pillar industry of the global economy, and with office markets an
integral component of capital flows, the nexus between global cities and global financial
markets has intensified (Lizieri, 2012).
Indeed, office markets in major global financial centres/cities, specifically in London, New
York and Tokyo, are not only significant to their respective national economy but also crucial
in the global economy, attracting international investment with increasing interest in real
estate as an asset class, especially by foreign investors (Newell and McGreal, 2017;Cai, 2018).
This is indicative of reported growth in the allocation of investors’funds to real estate with
JPIF
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The authors would like to acknowledge the generous support of Real Capital Analytics for providing
Real Capital Analytics CBD office markets transaction data for the necessary analyses in this paper.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 24 February 2020
Revised 1 April 2020
19 May 2020
Accepted 19 May 2020
Journal of Property Investment &
Finance
Vol. 39 No. 4, 2021
pp. 298-322
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-02-2020-0023
the rise in global real estate capital flows largely due to the asset’s distinctive and unique
characteristics. In particular, the real estate asset performance relative to other major
investment assets such as bonds and stocks, as well as its diversification potential within a
multi-asset portfolio, reflects the role of real estate as a core investment medium (Lizieri, 2009;
Baum, 2015). Moreover, as outlined by Lizieri (2009), the overall growth in global real estate
capital flows is continuing to be enhanced by innovation in real estate investment vehicles
and globalisation, amongst other competing factors (Lizieri, 2009).
Despite the sharp contraction in real estate investment during the global financial crisis
(GFC), momentum has gained traction since 2009 with market recovery driven by renewed
interest in the cross-border investment activity by a wider pool of investors and changing
geographies (Newell et al., 2010). Furthermore, the emergence of more noteworthy market
participants (sovereign wealth funds, endowment funds and investment banks), the
development of new realestate investment vehicles and the availability of debt financing are
factors stimulating interestin, and paving the way for, the cross-border real estateinvestment.
Whilst the underlying rationale behind international diversificationis the interconnection
between asset performance and economic fundamentals (Stevenson et al., 2014), real estate
investment is mostly concentrated in prime locations, particularly the office markets, in the
major global cities (Lizieri and Pain, 2014;Stevenson et al., 2014). This investor sentiment
towards prime locations is arguably intensified in periods of crisis and uncertainty (Haran
et al., 2016). Contrary to the expected adverse impact of this trend on diversificationbenefits
(Lizieri and Pain, 2014;Srivatsa and Lee, 2012;Stevenson et al., 2014;McAllister and Nanda,
2016) and the increasing significance of the emerging markets (Burrell, 2015;Haran et al.,
2016), the established global centres(cities) continue to attract significant investment flows. In
this respect, the evaluation of major global city indices and benchmarking reports [1]
consistently highlight London, New York and Tokyo as the major global cities in relationto
competitiveness, financialisation and capital. Furthermore, and particularly in terms of real
estate office investment, Lizieri and Pain (2014) and Zhu and Lizieri (2020) also envisaged
London, New Yorkand Tokyo as the top three cities attracting capital into their respective real
estate office sectors. For example, Zhu and Lizieri (2020) indicated that 27.5% of the global
office investments between 2007 and 2016 were concentrated in these three office markets.
Consequently, given this context, this paper provides an investigation into the
interrelationships and connectivity between office market investment in London, New
York and Tokyo over the period 2007 to 2017. This is realised through assessing the trends,
the relativity of internal to external investment in each of these central business district (CBD)
office markets with specific analysis by country of origin, investor type and the level of
interlinkages between these CBD office markets.
Literature review: capital market flows
Real estate, especially office markets are a significant component of global cities. According
to Lizieri and Pain (2014), real estate provides the physical structure for production process
and is the physical manifestation of city networks which coordinate the global financial
flows. Indeed, Lizieri and Pain (2014) suggested that this process is linked to the (re)
development of prime office markets and the growing concentration of functionally
specialized activity of advanced producer service (APS) firms. The literature highlights how
offices in global financial centres interlock occupation, ownership and finance, through the
growing globalization of real estate ownership and innovation in real estate investment
vehicles, thereby integrating finance and real estate in global and globalizing cities (Lizieri,
2009;Lizieri and Pain, 2014).
Real estate markets in global cities are the major destinations for capital flows, thereby
strengthening their connection with the global financial markets. For example, PGIM Real
Capital flows
and office
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