Predicting Commercial Real Estate Yields : A Note on Institutional and Cultural Factors as Measures of Risk

This paper aims at providing both a conceptual and practical framework for assessing real estate risk factors as a way of predicting real estate yields. Real estate returns - as those of any financial asset - are linked to their risk. However, real estate risk is much more difficult to measure than the risk of other, more liquid, financial assets. We assess the country-specific risk using level of development, as measured by GDP per capita, and - in addition - cultural and institutional variables. We find that, as expected, the GDP per capita measure accounts for much of the variance in real estate yields. Furthermore, institutional and cultural factors are also statistically significant in accounting for this variation, and improve the quality of yield prediction. A test of the accuracy of the model's prediction on out-of-sample data yielded satisfactory results. These findings are significant both from a theoretical and applied point of view