Impact of Institutional Investors on Real Estate Risk

Abstract

Private real estate markets have experienced significant in inflows of institutional capital over the last couple of decades. In this paper we seek to understand what are the implications of this recent development. Employing a generalized Hamiltonian Monte Carlo Bayesian procedure we find novel empirical evidence that market entry by large institutional investors predicts higher uncertainty and greater noise in real estate prices in the short and medium run, and lower longitudinal risk in the long run. Our findings point to a significant effect of institutional capital, which serves as a catalyst for structural changes in real estate market risk.

Keywords: Stochastic Volatility, Institutional Ownership, Investor Size, Real Estate Asset Volatility, Bayesian Estimation, Repeat Sales Model

JEL Classification: C11, C33, C81, G11, G14, R30