RISK AND RETURN IN EUROPEAN PROPERTY MARKETS - AN EMPIRICAL INVESTIGATION

In the absence of appropriate comparable sales data property valuation literature suggests building up the capitalisation and/or discount rate starting from a risk free rate. In response to this need the basic purpose of this paper is to explore and explain actual returns in different property markets across Europe. We present an analysis of risk-return relationships in real estate markets and the interactions between the local capital and property markets. Based on observed excess returns over long term riskless yields, we examine spreads and risk premia for individual property markets. Our findings are significant correlations between observed yield spreads in the markets. However, there exist large differences between European markets regarding the magnitude of spreads and the risk-return relationship. Furthermore, we observe longer periods of negative risk premia for many segments of the property market. The findings of the paper can partially be used to back up property valuersí assumptions when determining capitalisation and/or discount rates without having access to sufficient comparable transaction evidence.