European emerging real estate markets. Re-examining investment attributes and framing opportunities
| Date | 01 February 2016 |
| Published date | 01 February 2016 |
| Pages | 27-50 |
| DOI | https://doi.org/10.1108/JPIF-04-2015-0024 |
| Author | Martin Haran,Michael McCord,Peadar Davis,John McCord,Colm Lauder,Graeme Newell |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
European emerging
real estate markets
Re-examining investment attributes
and framing opportunities
Martin Haran, Michael McCord and Peadar Davis
School of the Built Environment, University of Ulster,
Newtownabbey, Northern Ireland
John McCord
School of Law, University of Ulster, Newtownabbey, Northern Ireland
Colm Lauder
MSCI Inc., London, UK, and
Graeme Newell
Department of Economics, Finance and Property,
University of Western Sydney, South Penrith, Australia
Abstract
Purpose –The purpose of this paper is to improve the transparency of European emerging real estate
market dynamics and performance attributes in the wake of the 2007-2008 global financial crisis (GFC).
The paper examines the extent and nature of inter-relationships between three emerging real estate
markets namely, the Czech Republic, Hungary and Poland as well as determining the rationale for
including emerging real estate markets within a Pan-European investment portfolio. The paper affords
a timely update following the reinstatement of lending provision for European emerging real estate
investment markets in 2014.
Design/methodology/approach –The paper employs lead-lag correlations and Grainger causality
to examine inter and intra relationships across three emerging European real estate markets, namely
the Czech Republic, Hungary and Poland over the period 2006-2014. Optimal portfolio analysis is
undertaken to explore the role of emerging real estate markets within the confines of a multi-asset
investment portfolio as well as a Pan-European real estate investment portfolio.
Findings –The findings demonstrate the opportunities afforded by the European emerging
real estate markets in terms of both performance enhancement and risk diversification.
Significantly, the findings highlight the lack of “uniformity”across the European emerging
markets in terms of their investment potential, with Grainger causality confirming that the real
estate markets in the Czech Republic, Hungary and Poland are not endogenous functions of
one-another’s performance.
Practical implications –This paper makes a considered contribution to the analytical interpretation
of European emerging property market performance across the real estate cycle. The research
demonstrates that the real estate markets in the Czech Republic, Hungary and Poland exhibit specific
investment characteristics which differentiate them from the more developed real estate markets
across Europe. Indeed emerging markets have the propensity to serve as both a risk diversifier as well
as performance enhancer within the confines of a pan-European real estate investment portfolio.
However, as the research clearly articulates, intricate understanding of the attributes afforded by the
different emerging markets as well as the divergence in sectoral dynamics/performance is integral to
portfolio allocation strategies.
Originality/value –Robust academic research on Europe’s emerging real estate markets has been
hampered by deficiencies in data provision. This study makes an innovative and timely contribution to
redressing the research vacuum through delineated examination of the performance dynamics of three
markets namely, the Czech Republic, Hungary and Poland, across the real estate cycle. The role and
Journal of Property Investment &
Finance
Vol. 34 No. 1, 2016
pp. 27-50
©Emerald Group Publis hing Limited
1463-578X
DOI 10.1108/JPIF-04-2015-0024
Received 24 April 2015
Revised 22 July 2015
Accepted 12 August 2015
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
27
European
emerging real
estate markets
function of emerging markets is depicted within the confines of a Pan-European direct real estate
investment portfolio at the all property level and in terms of sectoral specific allocations comprising
retail, office and industrial. The explicit added value of the paper is the propensity to bench-mark the
performance of emerging markets real estate markets on a like-for-like basis with developed real estate
markets across Europe facilitating the exploration of the role and function of emerging real estate
markets within a Pan-European investment context.
Keywords Real estate investment, Portfolio optimization, Emerging markets Europe,
Grainger causality, Lead-lag correlation, Real estate performance
Paper type Research paper
Introduction
Following a protracted period of instability within the European real estate sector
characterised by a flight to “prime”established markets; 2014 witnessed a “sea-of-change”
in investor sentiment towards “emerging”real estate markets. The global financial crisis
(GFC) and ensuing correction in European commercial property markets had prompted
investors to seek “shelter”in “core”established markets. With initial emphasis on
mitigating risks and stabilising cash flows, investors sought out investment opportunities
in jurisdictions considered to be the “safe havens”of European real estate. This trend
fuelled a marked increase in the intensity of competition for the best real estate in the best
locations. However a lack of suitable product (relative to demand) culminated in marked
price inflation prompting investors to widen their investment horizons.
As the wider European economic recovery gained traction there has been a marked
increase in investor appetite for “lesser”established real estate markets where prices are
consideredto afford greater opportunity for “value capture”or to take advantage of asset
mis-pricing and/or distressed sales. This to some extent explains the volumes of spill-over
investment from Western to Eastern Europe over the course of the 18 months to the end of
December 2014. With established office markets such as London and Paris achieving
yields of circa 3 per cent at the end of December 2014, investors have the propensity to
double their returns in Warsaw or Prague for only slightly higher risk dynamics.
The reinstatement of debt provision over the course of 2014 served to bolster confidence
and facilitate a more expansive range of investors to enter/re-enter emerging real estate
markets across Europe. Poland and the Czech Republic (in the absence of meaningful data
on the Russianmarket) continueto be the dominant emerging markets witha long history
in attracting German, Austrian and US funds that like the relatively high growth coupled
with greater security. However, it is noteworthy that within these two more “established”
markets investors have not confined their activity to Warsaw and Prague with the chase
for yield necessitating investor horizons to be expanded to encompass tier-two cities,
accepting (or ignoring) the risks associated with moving beyond these core cities, where
market transparency and performance may vary.
The new found confidence in European emergingreal estate markets over the course
of the 18 months to the end of December 2014 is perhaps best epitomised by the
volume of investment inflows into higher yielding countries such as Hungary and
Slovakia. This does not take away from the fact that investors continue to exercise
caution. Indeed,there is growing consensus within the real estate investment community
of the need for greater “granularity”and interpretation of performance within individual
countries and across the different real estate sectors when it comes to assessing the
viability of the perceived investment opportunities offered by emerging markets.
There is an extensive body of research pertaining to the direct real estate property
market within Europe. This bodyof research has examined convergence levels between
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