European real estate market convergence

Publication Date03 Aug 2012
AuthorRahul Srivatsa,Stephen L. Lee
SubjectProperty management & built environment
European real estate market
Rahul Srivatsa
Aberdeen Asset Management, London, UK, and
Stephen L. Lee
Cass Business School, City University London, London, UK
Purpose – The purpose of this paper is to test the extent of convergence in rents and yields in the
European real estate office market.
Design/methodology/approach The paper uses the concepts of beta-convergence and
sigma-convergence to evaluate empirically the hypothesis of rent and yield convergence in seven
European office markets during the period 1982-2009. Because of the introduction of a single currency
in January 1999, the analysis is carried out sequentially, first for the overall sample period and then the
periods before and after the introduction of the single currency.
Findings – The results indicate that, irrespective of the time period considered, there is not enough
statistical evidence of beta-convergence in either rents or yields but evidence of significant
sigma-convergence in rents and yields in the European office markets under review. Additionally,
some evidence is found that the introduction of the single currency in 1999 has led to increasing signs
of convergence, especially in the Continental European markets.
Practical implications The results show that the real estate office markets in Europe are not fully
integrated and so indicate that diversification across Europe is still a viable investment strategy.
Originality/value – This is the first paper to use beta and sigma convergence tests on European
office market data.
Keywords Europe, Real estate,Commercial property, Rentalvalue, European office markets,
Beta and sigma convergence
Paper type Research paper
Adam et al. (2002) argue that “financial markets are integrated when the law of one
price holds.” Given this definition, real estate market integration implies convergence
of rents and yields on properties that are domiciled in different countries and generate
identical cash-flows (Adjoute
´and Danthine, 2003; Baele et al., 2004; Bekaert and
Harvey, 1997, among others).
In reality, the law of one price could not hold true in the case of different assets,
i.e. different real estate market indices, which are not based not on the same underlying
properties. In addition, the law of one price does not necessarily hold true in the
presence of market frictions. Nonetheless, even if the underlying assets are not
identical, comparing property rents and yields across different countries gives insight
into the degree of synchronicity between markets. That is a positive co-movement
between property cash-flows in different countries could then be due to similarity of
the underlying assets, to common shocks, or to a mixture of both effects.
In order to test the law of one price Adam et al. (2002) used the concepts of
b-convergence and s-convergence to demonstrate the process of financial market
The current issue and full text archive of this journal is available at
Journal of Property Investment &
Vol. 30 No. 5, 2012
pp. 458-472
qEmerald Group Publishing Limited
DOI 10.1108/14635781211256738

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