Real Estate Finance in the New Economy Real Estate Issues Series

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 Economyexamines 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.

Preface xi

Acknowledgements xiii

1 International Economic Developments since the 1970s 1

Introduction 1

International trade theories: Setting the scene 2

International goods and capital flows 3

Theoretical models of trade 7

The Dunning eclectic paradigm 19

Porter’s model of competitive advantage of nations 24

Trading blocs and globalisation 27

Conclusions 28

Notes 28

References 28

2 International Real Estate Markets: Evolution 31

Introduction 31

Size of property market 33

User market 35

Investment market 42

Investor profile 48

Development 50

Financing of property 52

International real estate activity and trade models 55

Conclusions 59

Note 60

References 60

3 Financial Systems, Flow of Funds to Property and Innovations 63

Introduction 63

Bank-based and market-based financial systems 64

Property investors and intermediaries 67

Investment mechanisms 68

Innovations 74

Economic assessment of investment mechanisms 76

Impact of new investment mechanisms on business culture and practices 81

Conclusions 82

References 83

4 Property Investors, Investment Vehicles and Strategies 85

Size of property 85

Investment and investors 86

Property in investment portfolio 92

Investment strategies 98

Property investment and leverage 101

Conclusions 103

Appendix 4.1 104

References 107

5 Financial Markets, the New Economy and the Risk 109

Introduction 109

Value determinants of real estate in the twenty-first century 112

Theorising real estate linkages in the new economy 116

Financing of real estate in new economy 119

Leverage and risks 123

Conclusions 126

References 126

6 Real Estate Asset Bubbles 129

An introduction to cycles in real estate 129

Expectations and bubbles 136

Formation of real estate bubbles and its detection 139

Key patterns of past real estate bubbles 140

Explanations in the literature, new economy and role of credit 149

Conclusions 152

References 152

7 International Capital Flows in Property: Portfolio Diversification or Return Chasing 155

Introduction 155

Theoretical considerations in portfolio investment 159

Direct property in multi-asset portfolios 162

Direct property in property-only portfolios 164

Indirect property investment in multi-asset portfolios 165

Indirect real estate investment in real estate-only portfolios 166

Contradictions in research on diversification benefits from international property investment 167

Capital flows and property returns 168

Conclusions 170

References 170

8 International Financial Innovation, Real Estate and the Macroeconomy 175

Introduction 175

Real estate and macroeconomic interactions: Cycles and trends 175

Market cycles, risk and regional offices 187

Bubbles in asset markets 209

Risk management 210

Observations and conclusions 212

Notes 214

References 214

9 International Financial Innovation and Real Estate Market Performance 219

Introduction 219

Mortgage product development 219

Why use debt? 220

Risk analysis 222

Variable risk 223

The secondary mortgage market 224

Institutions and market performance 228

Cycles in real estate and the availability of finance 233

Conclusions 235

References 237

10 Real Estate in the New Economy 239

Introduction 239

The new economy and world economic structure 240

Real estate in the new economy 252

Overview and conclusions 255

Note 258

References 259

Index 261

Piyush Tiwari is Associate Professor of Property, Faculty of Architecture, Building and Planning, University of Melbourne

Michael White is Professor of Real Estate Economics, School of Architecture, Design and the Built Environment, Nottingham Trent University