Modelling Foreign Real Estate Investment: The Spanish Case

Abstract

Foreign real estate investment in Spain has grown considerably during the last decade, representing around 40% of total foreign direct investment inflows. This trend has exerted an important macroeconomic effect maintaining a long lasting housing bubble and contributing significantly to finance the rising current account deficit. Foreign real estate investment in Spain is mostly of a housing acquisition type and therefore the analysis of its determinants requires a specific approach. In this sense, neither a pure foreign direct investment nor a portfolio theoretical model might be useful. So we propose a modelling of foreign real estate investment for Spain from the point of view of a demand for tourism services and from a financial focus. Using time series data from 1990 to 2007 the hypothesis arising from our foreign real estate investment modelling reveals the consistency of this approach. There seem to be relevant determinants from the demand side and from the financial dimension. Indeed, Gross Domestic Product per capita, expected capital gains, travel costs, tourism agglomeration and housing prices are all relevant factors explaining Foreign real estate investment. We consider that this case study may also be applied to other countries sharing similar foreign real estate investment type flows.