International Real Estate Investments :

In the past, international real estate investment has consisted of direct equity investment in foreign countries. Such investments have traditionally been considered to provide diversification benefits given that it was assumed that such properties were affected predominately by their respective domestic economies. Of course another benefit of international investment is the ability to seek out the best risk adjusted returns, wherever they may be. Due to the recent globalization and securitization trends, today investors are finding that they have another investment option, international real estate public markets. This thesis addresses several of the issues related to the emergence of these markets in four countries: Germany, Australia, France, and Japan. For each of these countries extensive data was obtained for both the private and public markets in order to statistically examine various related relationships. Specifically, this thesis attempts to find answers to the three following questions: 1. Are GDP, rents, private, and public prices following a random walk or a trend-reverting pattern? 2. How does the local economy affect the real estate markets? 3. How do the public and private real estate markets relate with each other? It is important to note that the purpose of this thesis was to systematically examine the data, and then to present the results. An in-depth analysis of the results was not the intent. For Question one it was found that the majority of the public prices were random whereas the results for rents and private prices were predominately persistent. Also, an absence of any significant trends was found for the real estate data. These results would tend to indicate that for all of the countries studied the public market was much more volatile, and presumably efficient, than the private market. Question two related directly to the issue of diversification. A significant contemporaneous relationship was found to exist between GDP and the private market. And an even stronger contemporaneous linkage between GDP and public prices was also found. It was thus concluded that shifting from direct investment to public market investment would not likely increase diversification benefits. The results for Question three indicated a strong contemporaneous relationship between rents and private prices. The lagged relationships for the rents-public was found to be stronger than the contemporaneous in all the cases. The results for the private-public relationship were not consistent. For all the countries, except Germany public prices were found to lead private prices. Thesis Supervisor: William C. Wheaton Title: Professor of Economics ACKNOWLEDGMENTS I wish to express my gratitude to my thesis advisor, professor William C. Wheaton, for providing all the data needed for this thesis, as well as for his constructive guidance. I would like to thank both Alfonzo Leon and Martin Loketek for their patience, help, and support throughout this endeavor.