Stanimira Milcheva

Cross-Border Capital Flows into Real Estate

This study investigates the determinants of cross-border capital flows into direct real estate markets. In particular, it investigates how existing institutional, regulatory and real estate specific barriers affect cross-border real estate inflows and outflows in a sample of 24 developed and emerging countries, and whether investors seek out targets with lower barriers and regulatory arbitrage. We do not find evidence of significant cross-border institutional or regulatory arbitrage in the real estate market. However, real estate market liquidity is found to be the most important driver of cross-border flows. While many of the institutional barriers included in this analysis do not appear to impact the level of real estate inflows significantly, their presence tends to suppress real estate capital outflows to other countries. Overall, easy access to financial markets, a good economic environment and transparent real estate markets may enhance real estate outflows, while returns and the macroeconomy are found to enhance domestic real estate investment.

Asset pricing, spatial linkages and contagion in real estate stocks

Although spatial techniques have been used to capture the spillovers in asset returns across different regions, they have not yet been applied in an asset pricing context. Combining asset pricing models and equilibrium spatial models can be a good way to disentangle spillover effects across assets thereby accounting for systemic risks. We use an innovative approach and estimate a four-factor ‘Spatial’ Capital Asset Pricing Model (SCAPM) which allows us to account for correlations in the error terms. We can account for direct or indirect spillover effects in the presence of increased spillovers through the idiosyncratic component or of increased spillovers through the market respectively. We find that contagion dramatically increases during the global financial crisis and the spillover effect can explain up to 40% of total asset variation. In the rest of the time, idiosyncratic risks have been the predominant type of risk in real estate stocks. Our results have implications for investors showing that the market can channel asset volatility leading to contagion during crisis periods and therefore residual linkages between country indices need to be accounted for as a means of assessing the diversification benefits of a global portfolio.

Spatio-Temporal Effects of an Urban Development Announcement and Its Cancellation on House Prices A Quasi-Natural Experiment

We use a spatio-temporal autoregressive difference-in-differences (SDID) framework to assess the strength of the effect, distributed across space and time, of announcements associated with urban development on house prices. We use a quasi-natural experiment of a large-scale urban redevelopment project in Seoul, South Korea, first announced in 2007 and cancelled six years later without any construction having taken place. Using a rich dataset comprising of 21,200 apartment transactions between 2006 and 2015, we find that the development announcement effect accounts for an increase in apartment transaction prices by up to 7.3% depending on the location of the property from the project site. Prices decrease by up to 5.2% following the cancellation of the project. The SDID captures significant spatial autoregressive effects accounting for up to 15% of the changes in transaction prices, reducing the announcement effects from a standard DID model.

Real Estate Company Reactions to Financial Market Regulation

This study investigates how three regulatory reforms undertaken in the aftermath of the global financial crisis have affected returns of real estate companies. The three reforms are aimed at regulating different segments of the market – Basel III targets banks, and could restrict the availability of bank debt to the sector; the Alternative Investment Fund Management Directive (AIFMD) targets funds, which could increase compliance costs and reduce the potential investor pool; the European Market Infrastructure Regulation (EMIR) is aimed at derivative trading and could impact the cost of debt capital. We employ an event study methodology using daily stock returns of real estate companies and identify the regulatory events through news published in major international financial newspapers and news agencies. Our results show different responses across the three regulations. For Basel III we find support for the regulatory burden hypothesis of the bank lending channel for small real estate firms and firms with low debt-to-equity ratios as they cannot diversify their funding sources. The direct regulatory effect as tested using AIFMD announcements supports the profit-based reaction hypothesis for large firms. We also show that the news have asymmetric effects with tighter regulation news more frequently leading to significant responses in average abnormal returns (AARs) than loosening regulation news

Decisions on Bond Issuances by Banks

Next to deposits, European banks have, unlike their US counterparties which heavily rely on securitization to fund mortgages, historically largely used bank obligations such as covered bonds and senior unsecured bonds. We assess the decision of 402 European banks between 2006 and 2014 to issue three types of bonds – (private label) mortgage backed securities (MBS), covered bonds (CB) and senior unsecured bonds (SUB) – to account for balance-sheet substitution effects and their underlying channels. We estimate conditional probit and tobit models to simultaneously account for the choice between the three securities implying dependence between the decisions to issue either instrument. We show evidence for substitution through a funding liquidity channel; banks with more liquid balance sheets would choose to issue less CB and MBS whereas banks with high balance sheet maturity mismatch would choose to issue more MBS. There are substitution effects also for banks which more heavily rely on deposits issuing less CB and SUB. Overall, there is a higher probability to issue non-agency MBS in Europe by banks with high reliance on deposits, less risky loan portfolios, and high maturity mismatch prompting to a different role of this instrument in European bank funding as compared to the US. Most of the above effects vanish for the crisis period suggesting that banks’ funding decisions may have been driven by unobserved factors.

Conform or Resist? Spatio-Temporal Spillover Effects of Surrounding Apartment Transactions in a Boom and a Recession

As the transaction price of a comparable property in the local housing market is one the most accessible references for sellers and buyers, a change in a house price may result in spillover effects on future transactions of neighbouring properties. Given the dynamics on the real estate market, we can observe asymmetric effects, with those spillover effects being more pronounced in a rising market rather than in a falling market. This paper examines this hypothesis by comparing the spatio-temporal dependence in house prices during a boom and a recession period. Using data on 30,541 apartment transactions from Seoul, South Korea, this study finds that neighbouring property values are eight times more likely to spill over onto future transactions in a rising housing market as opposed to a falling one. We apply a spatio-temporal autoregressive model, rather than a spatial model, to control for spurious spatial relations that future transactions exert influence on past transitions. We show that accounting for unidirectional temporal relations improves the application of spatial econometrics in a hedonic house price model.

Spatial Dependence in Asset Pricing Models

When analyzing asset prices in isolation, the classical asset pricing models only account for the time-series variation of the asset with the factors. However, valuable information would be lost if some cross-sectional dependence exists across the assets. We extend the factor model in Fama and French (2012) to account for spatial dependence across returns and estimate a spatial factor model. We model the spatial linkages using a measure of physical distance between the properties of listed real estate companies. We find that the spatial factor model is not rejected and the spatial parameter is significant. The spatial factor model performs better than the factor model, substantially improving the model fit. Proximity across the property holdings of real estate companies can predict higher return correlation across the firms, controlling for size, book-to-market, and momentum characteristics.

The housing market channel of monetary policy transmission in the Euro area

The purpose of this paper is to explore the role of the housing market in the monetary policy transmission to consumption among euro area member states. It has been argued that the housing market in one country is then important when its mortgage market is well developed. The countries in the euro area follow unitary monetary policy; however, their housing and mortgage markets show some heterogeneity, which may lead to different policy effects on aggregate consumption through the housing market.,The housing market can act as a channel of monetary policy shocks to household consumption through changes in house prices and residential investment – the housing market channel. The authors estimate vector autoregressive models for each country and conduct a counterfactual analysis to disentangle the housing market channel and assess its importance across the euro area member states.,The authors find little evidence for heterogeneity of the monetary policy transmission through house prices across the euro area countries. Housing market variations in the euro area seem to be better captured by changes in residential investment rather than by changes in house prices. As a result, the authors do not find significantly large house price channels. For some of the countries however, they observe a monetary policy channel through residential investment. The existence of a housing channel may depend on institutional features of both the labour market or with institutional factors capturing the degree of household debt as is the loan-to-value ratio.,The study contributes to the existing literature by assessing whether a unitary monetary policy has a different impact on consumption across the euro area countries through their housing and mortgage markets. The authors disentangle monetary-policy-induced effects on consumption associated with variations on the housing markets due to either house price variations or residential investment changes. The authors show that the housing market can play a role in the monetary transmission mechanism even in countries with less developed mortgage markets through variations in residential investment.