Macroeconomic risk factors and Chinese FDIs in real estate: evidence from the Asia-Pacific public real estate markets

Abstract

PurposeThe aim of this study is to shed light on the relative importance of Chinese (Mainland China and Hong Kong: CH-HK) foreign direct investments (FDIs) in real estate (FDIRE) on the dynamics of Asia-Pacific (APAC) public real estate markets after the Global Financial Crisis.Design/methodology/approachUsing a parsimonious real estate asset-pricing model including macroeconomic risk factors, the authors develop a metric to measure FDIs in the real estate sector. The authors use a panel VAR approach based on robust econometric methodology (generalized method of moments) and deal with potential endogeneity and an eventual causality problem. The authors also compute multiple metrics to measure the Chinese, US and Japanese FDIs in the real estate sector.FindingsThe study results report a positive significant impact of CH-HK FDIRE on APAC public real estate returns, while FDIRE originating from outside China are not significant. The authors also show that Chinese investors use the channel of FDIs in Diversified Listed Property Companies (LPCs) and Hotel and Family LPCs to gain exposure to the APAC real estate markets. The study results suggest that APAC property markets are mainly impacted and emphasize the importance of an intercontinental diversification strategy for investors in LPCs in the APAC region.Practical implicationsContrary to Bond et al. (2003) who identified that APAC public real estate markets were overwhelmingly idiosyncratic in the decade preceding China's WTO membership (1990–2001), the study findings underline that Chinese FDIRE became a common factor affecting all eight markets in this study in the decade following the global financial crisis (2007–2017). The results emphasize the importance of an intercontinental diversification strategy for investors in LPCs in the APAC region.Originality/valueThe authors use a parsimonious model, introduce metrics to measure FDIRE and apply a panel VAR approach based on a robust econometric methodology to shed light on China's economic globalization strategy on Asia-Pacific public real estate markets after the GFC. The study results highlighting the major impact of CH-HK FDIRE on securitized real estate market returns dynamics, identify the existence of an Asian common factor driven by Chinese FDI inflows into neighbouring countries.