Do foreign buyers compress office real estate cap rates?

We investigate the relationship between the activity of foreign investors and capitalization rates in major European office markets. In the process, the paper provides a comprehensive analysis of the determinants of European office market capitalization rates. Using DTZ's Investment Transaction Database and data on a range of local sector-specific and macroeconomic variables across 28 key European cities over 1999-2013, we test several empirical hypotheses including potential endogenous determination of office capitalization rates and the level of foreign investment. A two-stage modelling exercise reveals that there is significant negative effect of foreign investment on office market cap rates. The results are robust across several model specifications and samples.