In recent years, the European real estate markets have been affected by a growing capital market orientation. This is evident, on the one hand, from the financing behaviour of property companies which increasingly focuses on the acquisition of equity capital and securitised loans on the organised capital market. This is partly due to a rise in the average financing volumes and the corresponding need for risk diversification. In addition, the increasing proliferation of real estate-based capital market instruments and rising experience of financial market intermediaries in the field of real estate finance have improved the profitability of this mode of financing. On the other hand, institutional and private investors seize new opportunities in the area of real estate investment. In the field of institutional investors, short-term and medium-term orientated investors (Opportunity Funds, Private Equity Funds) have been playing a far more important role in real estate markets in the recent past than in earlier times. Furthermore, one can observe a reorientation of long-term investors (e.g. insurance companies) from direct real estate investment to indirect investments in real estate securities. While most private investors still prefer direct real estate investments or indirect investment in investment funds, they also have a growing universe of stock market-based real estate products at their disposal. However, the current financial and real estate market crisis - which has its roots in the subprime mortgage market – has also proven the enormous risks of capital market-based real estate investments. Against this background the Centre for European Economic Research (Zentrum für Europäische Wirtschaftsforschung (ZEW)) has initiated an international research network focusing on the subject area of “Real Estate Markets and Capital Markets”, to be supported in the framework of the “Pact for Research and Innovation” programme by the Science Association Gottfried Wilhelm Leibniz (short: Leibniz Association). The network’s main goal is to bring experts from related fields of research (inter alia: real estate economics, financial markets, public finance, demographics, regional science) together to address the following key research questions: – What are the effects of the increasing influence of capital market-oriented investors/financial investors on the development of European residential property markets and commercial real estate markets? – Will real estate markets become more sensitive to capital market fluctuations (and vice versa)? Is the volatility of the real estate markets and, in particular, the probability of speculative bubbles likely to increase? –What are the risk-return characteristics of new real estate-based capital market instruments and what does that imply for the investment strategies of short-, medium-, and long term investors?

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