Is the UK real estate market converging with the rest of Europe?

A number of studies have examined the convergence in European real estate markets and find that convergence is time‐varying. Additionally, the returns of some countries, notably the UK, are as equally, if not more, influenced by the real estate returns in the USA than those in Europe. This paper aims to study the time‐varying convergence of the UK securitised real estate market shows with countries within Europe relative to that with the USA.

This paper utilizes a model estimated using a Kalman filter.

Using monthly data over the period 1990‐2007 we show that from 1990 to 1998 the returns of the UK securitised real estate were more influenced by the US market than the other countries in Europe. However, from autumn 1998 to 2004 the short‐run movements in the return of the UK securitised real estate market became increasingly associated with movements in the other countries in Europe market rather than the USA. But since 2004 the returns in the UK real estate have once again started to diverge from those of most countries in Europe.

This is the first paper to examine the time‐varying convergence of the securitised real estate markets using time‐varying parameter modelling techniques estimated by the Kalman filter. The results showing that the UK has not converged with the other markets in Europe, which implies that real estate diversification is still a viable investment strategy for UK investors in most countries in Europe.