The Real Estate Risk Premium: A Developed/Emerging Country Panel Data Analysis

In this article, the authors present a study of the country risk premium in the office real estate market. The authors identify the determinants of office capitalization rates across a panel of 52 emerging and developed countries between 2000 and 2006. The capitalization rate should be proportional to the perception of a country’s risk, as measured by the country’s government bond yields. Based on this assumption, the authors estimate an intertemporal country-specific real estate risk premium. In consideration of endogeneity, the authors also estimate a model to explain the 10-year government bond yield, which produces additional information on country risk assessment. The authors find that government bond yields are the main determinant of the capitalization rate. Real estate variables also play a role, but to a lesser extent.

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