IESE Research Papers,
IESE Business School

Abstract: I address the construction of hurdle rates for 66 countries that adequately compensate investors for the real estate specific market risks involved when investing, operating and exiting a foreign market. To estimate the market-based framework, I run random effect panel regressions for a period of six years from 2004-2009 of IPD direct property market returns and an integral and newly developed composite index that takes into account all real estate market and investment specific conditions. The regression results provide direct evidence that an increased perception of risk and instability in the countries' socio-economic conditions and institutional frameworks significantly imply higher investors' return expectations. Finally, the results provide international investors with an absolute hurdle rate that prices risks and opportunities of national real estate markets and guides investors in selecting a core, value-add, or opportunistic investment strategy.

Keywords: Hurdle Rate; Country Risk; Real Estate Investments; International Asset Allocation

JEL-codes: C23; C33; G11; G23; G24; O16; O18; P25; P52

14 pages, November 5, 2011

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