Explaining the Variation in Residential Capitalization Rates Worldwide: A Preliminary Investigation

In an increasingly global investment climate, mobile capital interested in residential investment generally seeks the highest return on invested capital (cap rate). However, we observe a very large range in these values. Systematic differences may be explained by tax rates, demographics, regional factors, net migration, political structure and transition, homeownership rates, and other social and economic indicators. For this preliminary investigation, a set of data from Global Property Guide, an on-line investor-related service that has upper-end residential sales and rental information in over 100 countries, was augmented by World Bank data for 2010. A second data set by UN Habitat covers many less-affluent nations during a transitionary period in the world economy during the 1990s is also available. For 2010, factors related to national affluence, availability of credit, and transaction costs were associated with lower residential cap rates. In 1998, only regional dummy variables for politics are significant for developing countries.