In the aftermath of the global financial crisis (GFC) regulators tried to strengthen the resilience of the financial system and reduce systemic risks by improving the existing financial market regulations and putting new regulations in place. Some of the main regulatory reforms which have been introduced at the international level include Basel III, the Alternative Investment Fund Management Directive (AIFMD) and the European Market Infrastructure Regulation (EMIR), which regulates OTC derivatives. A study by Milcheva, Hoesli and Moss funded by the European Public Real Estate Association (EPRA) shows that investors in real estate equities and credit default swaps respond significantly to news about financial market regulation. However, there are some differences in the effects across countries, size of companies, debt level of the firms. In addition, different types of financial market regulation have different effects on the public equity sector. The strongest effects are associated with the regulation for banks, Basel III, and the regulation of non-UCITS funds, AIFMD. The effects on the credit default swaps are much larger in scale but only a few are significant.
The most significant effects following regulatory news are observed for UK companies, large companies and highly leveraged companies. This is in line with expectations. Larger companies are more likely to be affected as they have greater stock liquidity which provides a mechanism for an immediate stock market response to news regarding financial regulation. More highly leveraged companies are more responsive to changes in regulations targeting primary the debt funding sources for listed real estate companies. The authors do not see that the abnormal returns are associated with increased credit risks as credit default spreads do not respond significantly to most news. Companies respond significantly to regulatory announcements mainly associated with negative news rather than positive news.
The research implies that although the regulatory reforms have not been specifically designed to regulate the public equity real estate market, spillovers through the credit channel can have important implications for companies which business is derived from the management and operation of real estate assets. Regulators may want to consider the indirect implications of the broad financial market regulations for sectors highly depending on debt such as the real estate sector and provide alternative sources of finance.