Rental depreciation and capital expenditure in the UK commercial real estate market, 1993–2009

This paper identifies the long-term rental depreciation rates for UK commercial properties and rates of capital expenditure incurred to offset depreciation over the same period. It starts by reviewing the economic depreciation literature and the rationale for adopting a longitudinal method of measurement, before discussing the data used and results. Data from 1993 to 2009 were sourced from Investment Property Databank and CB Richard Ellis real estate consultants. This is used to compare the change in values of new buildings in different locations with the change in values of individual properties in those locations. The analysis is conducted using observations on 742 assets drawn from all major segments of the commercial real estate market. Overall rental depreciation and capital expenditure rates are similar to those in other recent UK studies. Depreciation rates are 0.8% pa for offices, 0.5% pa for industrial properties and 0.3% pa for standard retail properties. These results hide interesting variations at a segment level, notably in retail where location often dominates value rather than the building. The majority of properties had little (if any) money spent on them over the last 16 years, but those subject to higher rates of expenditure were found to have lower depreciation rates.

Experience and real estate investment decision-making: a process-tracing investigation

This study investigates the impact of experience upon trained behaviours in real estate investment decision‐making. In a controlled experiment design, two groups of subjects, experts and novices, conduct an evaluation and reach a decision about two investment options. Using a process‐tracing technique, each subject’s behaviour is observed and recorded. Differences between the groups are discovered in relation to some behaviour characteristics, but experience appears not to impact all behaviours. These findings are discussed in relation to the current absence of a universal normative model of real estate investment decision‐making. In an associated component of the study, the belief that monetary compensation is needed in order to render valid results from studies such as this is tested. We find this not to be the case.

Domestic and foreign bias in global real estate mutual fund investment allocations

The purpose of the study is to seek a better understanding of the investment allocation behaviour of the real estate mutual funds by focusing on asset allocation at the country level. Analysing the country allocation of 553 real estate mutual funds domiciled in 20 countries, we attempt to trace how investment bias exists across countries and affects their country allocations. Our results evidence the existence of disproportionate country allocation to their domestic markets (domestic bias) and to each foreign market (foreign bias). We also find each bias is influenced by different sets of variables: real estate market influences for domestic bias and familiarity influences for foreign bias. This difference in factors influential for each bias in part explains the conflated relationship between the two biases.

Transaction based indices for the UK commercial real estate market: an exploration using IPD transaction data

The nature of private commercial real estate markets presents difficulties for monitoring market performance. Assets are heterogeneous and spatially dispersed, trading is infrequent and there is no central marketplace in which prices and cash flows of properties can be easily observed. Appraisal based indices represent one response to these issues. However, these have been criticised on a number of grounds: that they may understate volatility, lag turning points and be affected by client influence issues. Thus, this paper reports econometrically derived transaction based indices of the UK commercial real estate market using Investment Property Databank (IPD) data, comparing them with published appraisal based indices. The method is similar to that presented by Fisher, Geltner, and Pollakowski (2007) and used by Massachusett, Institute of Technology (MIT) on National Council of Real Estate Investment Fiduciaries (NCREIF) data, although it employs value rather than equal weighting. The results show stronger growth from the transaction based indices in the run up to the peak in the UK market in 2007. They also show that returns from these series are more volatile and less autocorrelated than their appraisal based counterparts, but, surprisingly, differences in turning points were not found. The conclusion then debates the applications and limitations these series have as measures of market performance.

Serial persistence in individual real estate returns in the UK

Purpose – The purpose of this paper is to examine individual level property returns to see whether there is evidence of persistence in performance, i.e. a greater than expected probability of well (badly) performing properties continuing to perform well (badly) in subsequent periods. Design/methodology/approach – The same methodology originally used in Young and Graff is applied, making the results directly comparable with those for the US and Australian markets. However, it uses a much larger database covering all UK commercial property data available in the Investment Property Databank (IPD) for the years 1981 to 2002 – as many as 216,758 individual property returns. Findings – While the results of this study mimic the US and Australian results of greater persistence in the extreme first and fourth quartiles, they also evidence persistence in the moderate second and third quartiles, a notable departure from previous studies. Likewise patterns across property type, location, time, and holding period are remarkably similar. Research limitations/implications – The findings suggest that performance persistence is not a feature unique to particular markets, but instead may characterize most advanced real estate investment markets. Originality/value – As well as extending previous research geographically, the paper explores possible reasons for such persistence, consideration of which leads to the conjecture that behaviors in the practice of institutional-grade commercial real estate investment management may themselves be deeply rooted and persistent, and perhaps influenced for good or ill by agency effects. - See more at: http://www.emeraldinsight.com/journals.htm?articleid=1602884&show=abstract#sthash.hc2pCmC6.dpuf

Development appraisal in practice: some evidence from the planning system

Due to the requirement to demonstrate financial feasibility of policy proposals and scheme-specific planning obligations, development viability and development appraisal have become core themes in the English planning system. The objective of this paper is to evaluate the application of development appraisal in practice. The paper reviews the literature and the models available to assess the viability of development and analyses a sample 19 development viability appraisals to identify practice. The paper concludes that the practice of development appraisal deviates significantly from the tenets of capital budgeting theory. In particular, in addition to a propensity to oversimplify the timing of income and expenditure, the way in which debt, developer’s return and value and cost change are handled in practice illustrates a major gap between mainstream capital budgeting theory and development appraisal in practice.

Lessons from the private finance initiative in the UK: benefits, problems and critical success factors

Purpose – This paper summarises the main research findings from a detailed, qualitative set of structured interviews and case studies of private finance initiative (PFI) schemes in the UK, which involve the construction of built facilities. The research, which was funded by the Foundation for the Built Environment, examines the emergence of PFI in the UK. Benefits and problems in the PFI process are investigated. Best practice, the key critical factors for success, and lessons for the future are also analysed. Design/methodology/approach – The research is based around 11 semi-structured interviews conducted with stakeholders in key PFI projects in the UK. Findings – The research demonstrates that value for money and risk transfer are key success criteria. High procurement and transaction costs are a feature of PFI projects, and the large-scale nature of PFI projects frequently acts as barrier to entry. Research limitations/implications – The research is based on a limited number of in-depth case study interviews. The paper also shows that further research is needed to find better ways to measure these concepts empirically. Practical implications – The paper is important in highlighting four main areas of practical improvement in the PFI process: value for money assessment; establishing end-user needs; developing competitive markets and developing appropriate skills in the public sector. Originality/value – The paper examines the drivers, barriers and critical success factors for PFI in the UK for the first time in detail and will be of value to property investors, financiers, and others involved in the PFI process.

Ecommerce and retail in the UK and USA

Presents findings from separate research projects conducted in the UK and the USA on the impact of e-commerce on retailers and retail property. Examines differences between UK and US retailers along several dimensions: Internet strategies, perceptions of the Internet, barriers to e-commerce growth, and future space requirements. Overall, findings indicate that UK and US retailers have similar attitudes about e-commerce. Specifically, retailers in both samples perceive little threat or impact from e-commerce. Second, barriers to e-commerce growth are similar for UK and US retailers and include fulfillment and security issues. Third, UK and US retailers indicate that their retail space needs will remain the same or increase in the short term, despite the threat of e-commerce. Finally, both sets of retailers believe that entertainment is an important strategy if shopping centers are to remain viable.

Migration, immobility and displacement outcomes following extreme events

There is growing international concern at the rise in the severity of impact and frequency of extreme environmental events, potentially as a manifestation of global environmental change. There is a widely held belief that this trend could be linked with a future rise in the migration or displacement of human populations. However, recent approaches to migration influenced by environmental change call into question the notion that migration can be ascribed in a singular way to particular environmental causes or events. This paper undertakes a systematic review of evidence on population movements associated with weather-related extreme events. The paper demonstrates that in the face of extreme environmental events, it is important to distinguish between three outcomes – migration, displacement, and immobility – each of which interact and respond to multiple drivers. It also proposes a further insight: that both those who move, and those who do not move, may find themselves trapped and vulnerable in the face of such extreme events. A review of evidence suggests that short-term displacement that goes hand-in-hand with loss of life, destruction of property and economic disruption poses significant risks not because it is ‘environmental migration’, but because it represents a failure of adaptation to environmental change.

Do smart grids offer a new incentive for SME carbon reduction?

Collectively small and medium sized enterprises (SMEs) are significant energy users although many are unregulated by existing policies due to their low carbon emissions. Carbon reduction is often not a priority but smart grids may create a new opportunity. A smart grid will give electricity suppliers a picture of real-time energy flows and the opportunity for consumers to receive financial incentives for engaging in demand side management. As well as creating incentives for local carbon reduction, engaging SMEs with smart grids has potential for contributing to wider grid decarbonisation. Modelling of buildings, business activities and technology solutions is needed to identify opportunities for carbon reduction. The diversity of the SME sector complicates strategy development. SMEs are active in almost every business area and occupy the full range of property types. This paper reviews previous modelling work, exposing valuable data on floor space and energy consumption associated with different business activities. Limitations are seen with the age of this data and an inability to distinguish SME energy use. By modelling SME energy use, electrical loads are identified which could be shifted on demand, in a smart network. Initial analysis of consumption, not constrained by existing policies, identifies heating and cooling in retail and commercial offices as having potential for demand response. Hot water in hotel and catering and retail sectors may also be significant because of the energy storage potential. Areas to consider for energy efficiency schemes are also indicated.

Proprietary estoppel: a functional analysis

This article argues in favour of a functional analysis of proprietary estoppel which focuses on the role of the doctrine in enabling claims to the informal acquisition of property rights in land. The article shows that adopting such an analysis both assists our understanding of two recent decisions of the English House of Lords and helps to resolve issues of taxonomy that arise in relation to the doctrine. A functional analysis both unites the sub-categories of proprietary estoppel into a single principle and distinguishes this principle from other types of estoppel claim. It is suggested, however, that the unification of common law and equitable estoppel remains both possible and desirable as long as ‘unification’ is understood broadly and is not confined to the recognition of a doctrine that is identical in its scope and operation in all cases. It is further shown that despite a lack of discussion of the concept in the House of Lords, unconscionability continues to play a key role in proprietary estoppel and therefore in the informal acquisition of property rights. Unconscionability may now benefit from a closer connection with the other elements of claims which should prevent abuse of the concept and allay concerns of ‘palm-tree justice’.

Forecasting real estate returns using financial spreads

This paper examines the predictability of real estate asset returns using a number of time series techniques. A vector autoregressive model, which incorporates financial spreads, is able to improve upon the out of sample forecasting performance of univariate time series models at a short forecasting horizon. However, as the forecasting horizon increases, the explanatory power of such models is reduced, so that returns on real estate assets are best forecast using the long term mean of the series. In the case of indirect property returns, such short-term forecasts can be turned into a trading rule that can generate excess returns over a buy-and-hold strategy gross of transactions costs, although none of the trading rules developed could cover the associated transactions costs. It is therefore concluded that such forecastability is entirely consistent with stock market efficiency.

Threshold autoregressive and Markov switching models: an application to commercial real estate

Although financial theory rests heavily upon the assumption that asset returns are normally distributed, value indices of commercial real estate display significant departures from normality. In this paper, we apply and compare the properties of two recently proposed regime switching models for value indices of commercial real estate in the US and the UK, both of which relax the assumption that observations are drawn from a single distribution with constant mean and variance. Statistical tests of the models' specification indicate that the Markov switching model is better able to capture the non-stationary features of the data than the threshold autoregressive model, although both represent superior descriptions of the data than the models that allow for only one state. Our results have several implications for theoretical models and empirical research in finance.

What does “retrofit” mean, and how can we scale up action in the UK sector?

Purpose – Progress in retrofitting the UK's commercial properties continues to be slow and fragmented. New research from the UK and USA suggests that radical changes are needed to drive large-scale retrofitting, and that new and innovative models of financing can create new opportunities. The purpose of this paper is to offer insights into the terminology of retrofit and the changes in UK policy and practice that are needed to scale up activity in the sector. Design/methodology/approach – The paper reviews and synthesises key published research into commercial property retrofitting in the UK and USA and also draws on policy and practice from the EU and Australia. Findings – The paper provides a definition of “retrofit”, and compares and contrasts this with “refurbishment” and “renovation” in an international context. The paper summarises key findings from recent research and suggests that there are a number of policy and practice measures which need to be implemented in the UK for commercial retrofitting to succeed at scale. These include improved funding vehicles for retrofit; better transparency in actual energy performance; and consistency in measurement, verification and assessment standards. Practical implications – Policy and practice in the UK needs to change if large-scale commercial property retrofit is to be rolled out successfully. This requires mandatory legislation underpinned by incentives and penalties for non-compliance. Originality/value – This paper synthesises recent research to provide a set of policy and practice recommendations which draw on international experience, and can assist on implementation in the UK.

The Article 51 reporting requirement for self-defense actions

This article examines one legal criterion for the exercise of the right of self-defense that has been significantly overlooked by commentators: the so-called “reporting requirement.” Article 51 of the United Nations (UN) Charter provides, inter alia, that “[m]easures taken by members in the exercise of this right of self-defense shall be immediately reported to the Security Council.” Although the requirement to report all self-defense actions to the Council is clearly set out in Article 51, the Charter offers no further guidance with regard to this obligation. Reference to the practice of states since the UN’s inception in 1945 is therefore essential to understanding the scope and nature of the reporting requirement. As such, this article is underpinned by an extensive original dataset of reporting practice covering the period from January 1, 1998 to December 31, 2013. We know from Article 51 that states “shall” report, but do they, and—if so—in what manner? What are the various implications of reporting, of failing to report, and of the way in which states report? How are reports used, and by whom? Most importantly, this article questions the ultimate value of states reporting their self-defense actions to the Security Council in modern interstate relations.