The Impact of Financial Regulations on the European Listed Real Estate Sector

Centre for Real Estate & Planning Research at Henley Business School

By Ruth Pugh, Research Coordinator

In the aftermath of the global financial crisis (GFC) regulators tried to strengthen the resilience of the financial system and reduce systemic risks by improving the existing financial market regulations and putting new regulations in place (Basel III, the Alternative Investment Fund Management Directive and the European Market Infrastructure Regulation). REP research, conducted by Dr Stanimira Milcheva in collaboration with the University of Geneva, provides the first assessment of the contemporaneous effects of these reforms specifically on the European listed real estate sector. The main focus was on analyzing the short-term impact of regulation on the price of equity, credit and market risk of listed real estate companies in the major listed markets of France, Germany and the U.K. Moreover, the response of listed real estate companies to those announcements was assessed.

Results suggest that on average market participants trading real estate equities and credit default swaps respond significantly to regulatory announcements; however, differences across countries, types of companies (large versus small, more leveraged versus less leveraged) and the regulations themselves were observed. The most significant effects following regulatory news were observed for UK companies, large companies and highly leveraged companies. Abnormal returns seem not to be associated with increased credit. Companies were observed to respond significantly to regulatory announcements mainly associated with negative news rather than positive news which can be seen as evidence for an asymmetrical return response to shocks. Overall, although the listed real estate sector is not specifically regulated, we have identified that it is affected by news regarding financial regulatory reforms, with the majority of the returns significantly decreasing following the announcements.

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