International capital movement towards the Spanish real estate sector

Abstract

PurposeThe purpose of this paper is to examine the determinants that affect international capital flows (ICF) toward the Spanish real estate market over the period 1995 first quarter to 2017 fourth quarter.Design/methodology/approachVECM methodology is used to analyze time series and panel methods using pooled EGLS regression.FindingsVECM parameter results for construction and real estate activities sectors, quickly suggesting a stable performance of capital flows toward Spanish real estate sector that the short-term fluctuation of foreign investment results contributes to the long-term equilibrium relatively soon. By applying the Monetary theory of Johnson, the model identifies a relevant role of M3 explaining capital flows to real estate, together with the lagged variables of construction and real estate activities capital flows, Spanish real interest rate and Spain’s economic growth rate; they are the significant determinants on capital movement to Spanish real estate sector. Interestingly, Spanish housing prices as an exogenous variable, directly, significantly and negatively affect real estate capital flows in all cases as a way to capture the assets price bubble.Practical implicationsFindings highlight reasons affecting capital flows to real estate and construction activities to Spanish sectors which allow capital Funds to take into account those drivers in their investment decisions.Originality/valueThis paper is the first attempt to analyze the determinants of ICF to Spanish real estate market; it has a significant meaning for both Spanish economy and international investors.