International capital movement towards the Spanish real estate sector
| DOI | https://doi.org/10.1108/JPIF-05-2019-0067 |
| Pages | 107-127 |
| Published date | 08 January 2020 |
| Date | 08 January 2020 |
| Author | Su Zhenyu,Paloma Taltavull |
| Subject Matter | Property valuation & finance,Property management & built environment |
International capital movement
towards the Spanish
real estate sector
Zhenyu Su and Paloma Taltavull
Department of Applied Economic Analysis,
University of Alicante, Alicante, Spain
Abstract
Purpose –The purpose of this paper is to examine the determinants that affect international capital flows
(ICF) toward the Spanish real estate market over the period 1995 first quarter to 2017 fourth quarter.
Design/methodology/approach –VECM methodology is used to analyze time series and panel methods
using pooled EGLS regression.
Findings –VECM parameter result s for construction and real estate act ivities sectors, quickly suggest ing
a stable performance of ca pital flows toward Spanish real estate sector t hat the short-term fluctuation of
foreign investment res ults contributes to the lo ng-term equilibrium r elatively soon. By applyi ng the
Monetary theory of Johns on, the model identifi es a relevant role of M3 expla ining capital flows to re al
estate, together with th e lagged variables of construction and real es tate activities capital flows, Spanish
real interest rate and Sp ain’s economic growth rat e; they are the significant determinants on capita l
movement to Spanish real estate sector. Interestingly, Spanish housing prices as an exogenous variable,
directly, significant ly and negatively affec t real estate capital flo ws in all cases as a way to capture t he
assets price bubble.
Practical implications –Findings highlight reasons affecting capital flows to real estate and
construction activities to Spanish sectors which allow capital Funds to take into account those drivers in their
investment decisions.
Originality/value –This paper is the first attempt to analyze the determinants of ICF to Spanish real estate
market; it has a significant meaning for both Spanish economy and international investors.
Keywords Spain, Foreign investment, International capital flows, Panel methods, Real estate sectors,
Vecm models
Paper type Research paper
1. Introduction
International capital movement has been hit hard by the global financial crisis (GFC).
However, according to International Monetary Fund statistics, and the UNCTAD (2018)
World Investment Report, the world economy and global capital flows have both now
recovered to pre-crisis levels; the influence of the GFC is waning. In terms of foreign direct
investment (FDI), services FDI has increased in recent years and FDI in real
estate are expected to increase globally. Evidence of this trend is reflected by the fact
that, in recent years, there has been a rapid growth in direct real estate investment
(Fereidouni and Masron, 2013). Meanwhile, international investors’confidence has
gradually been re-established; many investors have increased their allocation of funds to
overseas real estate markets, resulting in a significant surge since 2009, as JLL(2018)
report (see Figure 1). Europe has been one of the destinations for this global investment
and evidence supports that capital flows toward Europe remained robust during the crisis
(Newell et al., 2010).
Compared to the body of empirical research on the international flows of trade, FDI and
more recently bonds and equities, there has been relatively limited research on cross-border
real estate investment flows (McAllister and Nanda, 2014, p. 2). The relationship of property
with other investment classes is explained by the portfolio theory (Grissom and Porter,
2010), allowing investors to reduce the risk of international investments (Haran et al., 2013).
In Spain, foreign capital inflows (CF) to its real estate market show a steady and increasing
Received 23 May 2019
Revised 27 September 2019
2 November 2019
18 November 2019
Accepted 19 November 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
The Spanish
real estate
sector
JournalofProperty Investment&
Finance
Vol.38 No. 2, 2020
pp.107-127
©EmeraldPublishingLimited
1463-578X
DOI10.1108/JPIF-05-2019-0067
107
trend (see Figure 2) compared to other foreign CF (Rodríguez and Bustillo, 2010), which
suggests that the Spanish real estate market represents a new market for international
investors. However, the questions about why the Spanish real estate market has become
more attractive to foreign investors, and what determinants are causing this happened
remain unexplained in the existing literature.
Most of the foreign real estate investment studies have focused on micro indicators like
cap-rate or yields as the main drivers to explain the global CF. However, the traditional
economic theories, based on macro-variables to explain the reasons why capital moves
among economies, have been relatively explored in the real estate literature. As well as
following the specific real estate indicators, the large amount of capital seen in Figures 1
and 2 (and their shifts) may possibly have followed macro-economic drivers in terms of
decisions on the location in which to enter in the (real estate) sector; in other words, prior to
deciding to invest in real estate, the capital flows would test the macro indicators in the
area in order to evaluate the potential benefits environment. If so, the macro-economic
situation is responsible for the direction of investment flows and could determine whether
0
50
100
150
200
250
2005Q2
2005Q4
2006Q2
2006Q4
2007Q2
2007Q4
2008Q2
2008Q4
2009Q2
2009Q4
2010Q2
2010Q4
2011Q2
2011Q4
2012Q2
2012Q4
2013Q2
2013Q4
2014Q2
2014Q4
2015Q2
2015Q4
20Q6Q2
2016Q4
2017Q2
2017Q4
Source: JLL, available at: www.theinvestor.jll/gcf/
Figure 1.
Quarterly global real
estate transaction
volume, 2005Q2–
2018Q2 (in billions
US dollars)
–0.500
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
1º1995
1º1996
1º1997
1º1998
1º1999
1º2000
1º2001
1º2002
1º2003
1º2004
1º2005
1º2006
1º2007
1º2008
1º2009
1º2010
1º2011
1º2012
1º2013
1º2014
1º2015
1º2016
1º2017
Construction Real estate activities
Source: Ministry of industry, trade and tourism of Spain, available at: http://datainvex.
comercio.es/principal_invex.aspx
Figure 2.
International
investment to Spanish
real estate sector,
1995Q1–2017Q4
(in billions of euros)
JPIF
108
38,2
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