Real Estate Finance in the New Economy

The financial deregulation of the last quarter century has meant large flows of funds around the world seeking the highest risk-adjusted return for investors. Real estate is now established as an important asset class and advances in information technology provide the necessary tools to complement global developments in real estate finance and investment.

A variety of investment vehicles have emerged, andReal Estate Finance in the New Economy examines these along with financing and risk in the context of globalization, deregulation and an increasingly integrated international world economy by exploring questions like:

• How have real estate financial structures evolved as economies grow and become internationalised?
• What role do economic change and financial systems play in the development of real estate investment? 
• Are the risks associated with the ‘new economy’ really new?
• What is the future direction for real estate financing?

The authors develop an economic framework for discussions on individual financial products to examine how real estate financial structures change with economic growth and internationalisation and also to show how developments in real estate finance impact economic growth.

Michael White, Reader in Urban Studies, Heriot-Watt University

Preface

Acknowledgements

Chapter 1: International Economic Developments since the 1970s 1

1.1 Introduction 1

1.2 International Trade: Setting the Scene 1

1.3 International Goods and Capital Flows 2

1.4 Theoretical Models of Trade 6

1.5 The Dunning Eclectic Paradigm 17

1.6 Porter’s Model of Comparative Advantage of Nations 21

1.7 Trading Blocks and Globalisation 23

1.8 Conclusions 24

1.9 References 25

Chapter 2: international Real Estate Markets – Evolution 26

2.1 Introduction 26

2.2 The Size of the Property Market 27

2.3 User Market 29

2.4 Investment Market 37

2.5 Investor Profile 42

2.6 Development 44

2.7 Financing of Property 47

2.8 International Real Estate Activity and Trade Models 50

2.9 Conclusions 54

References 55

Chapter 3: Financial Systems, Flow of Funds to Property and Innovations 57

3.1 Introduction 57

3.2 Bank based and Market based Financial Systems 57

3.3 Property investors and intermediaries 60

3.4 Investment Mechanisms 62

3.5 Innovations 66

3.6 Economic assessment of investment mechanisms 67

3.7 Impact of new investment mechanisms on business culture and practices 71

3.8 Conclusions 73

References 74

Chapter 4: Property Investors, Investment Vehicles and Strategies 76

4.1 Size of property 76

4.2 Investment and Investors 76

4.3 Property in investment portfolios 81

4.4 Investment strategies 85

4.5 Property investment and leverage 86

4.6 Conclusions 87

References 89

Appendix 4.1 91

Chapter 5: Financial Markets, the new economy and the risk 94

5.1 Introduction 94

5.2 Real estate in the new economy 95

5.3 Leverage and risks 100

5.4 Financing through equity and debt 101

References 102

Chapter 6: Real Estate Asset Bubbles 103

6.1 An introduction to cycles in real estate 103

6.2 Expectations and bubbles 107

6.3 Formation of real estate bubbles and its detection 110

6.4 Key patterns of past real estate bubbles 111

6.5 Explanations in the literature, New economy, role of credit 120

6.6 Conclusions 122

References 123

Chapter 7: International Capital flows in property: Portfolio diversification or Returns Chasing? 126

7.1 Introduction 126

7.2 Theoretical considerations in portfolio investment 129

7.3 Direct property in multi-asset portfolios 132

7.4 Direct property in property only portfolios 133

7.5 Indirect property investment in multi-asset portfolios 134

7.6 Indirect Real Estate Investment in Real Estate only Portfolios 135

7.7 Contradictions in research on diversification benefits from international property investment 136

7.8 Capital flows and property returns 137

7.9 Conclusions 139

References 140

Chapter 8: international Financial Innovation, Real Estate, and the Macroeconomy 145

8.1 Introduction 145

8.2 Real Estate and Macroeconomic Interactions: Cycles and Trends 145

8.3 Bubbles in Asset Markets 155

8.4 Risk Management 158

8.5 Observations and Conclusions 160

References 162

Chapter 9: international Financial Innovation and Real Estate Market Performance 166

9.1 Introduction 166

9.2 Mortgage product development 166

9.3 Why use debt? 168

9.4 Risk Analysis 169

9.5 Variable Risk 170

9.6 The Secondary Mortgage Market 171

9.7 Institutions and Market Performance 174

9.8 Cycles in Real Estate and the Availability of Finance 178

9.9 Conclusions 179

References 181

Chapter 10: Real Estate in the New Economy 182

10.1 Introduction 182

10.2 The new economy and world economic structure 182

10.3 Real Estate in the New Economy 191

10.4 Overview and Conclusions 194

References 197

Index

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