Required returns for real estate in UK pension fund portfolios

The position of Real Estate within a multi-asset portfolio has received considerable attention recently. Previous research has concentrated on the percentage holding property would achieve given its risk/return characteristics. Such studies have invariably used Modern Portfolio Theory and these approaches have been criticised for both the quality of the real estate data and problems with the methodology itself. The first problem is now well understood, and the second can be addressed by the use of realistic constraints on asset holdings. This paper takes a different approach. We determine the level of return that Real Estate needs to achieve to justify an allocation within the multi asset portfolio. In order to test the importance of the quality of the data we use historic appraisal based and desmoothed returns to examine the sensitivity of the results. Consideration is also given to the Holding period and the imposition of realistic constraints on the asset holdings in order to model portfolios held by pension fund investors. We conclude, using several benchmark levels of portfolio risk and return, that using appraisal based data the required level of return for Real Estate was less than that achieved over the period 1972-1993. The use of desmoothed series can reverse this result at the highest levels of desmoothing although within a restricted holding period Real Estate offered returns in excess of those required to enter the portfolio and might have a role to play in the multi-asset portfolio.

The effects of information presentation on real estate market perceptions

The study seeks to identify systematic differences in perception of the real estate market caused by the frames through which people obtain market information. We operationalise the frames through manipulation of data presentation in a commercial real estate market report, selectively controlling time scale, proportionality distortion and negative value presentation. Our findings suggest that such differences are real and their effects should be taken into account in the design and interpretation of market reports.

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

An analysis of the determinants of cross-border real estate development flows

This paper investigates the scale and drivers of cross-border real estate development in western and central and eastern Europe (CEE). Drawing upon existing literature on the integration of international real estate markets, we make some inferences on expected patterns of cross-border real estate development from this literature review. The paper draws upon a transactions database in order to assess the penetration of national markets by international real estate developers. The determinants of cross-border transaction flows are modeled as a function the range of economic and real estate variables. Whilst western European markets tend to be dominated by local developers, much higher levels of market penetration by international real estate developers are found in the less mature markets of central and eastern Europe. Empirical modelling based on gravity model specifications reveal the importance of size of the economies, distance between countries, extent of globalization and EU membership as significant determinants of cross-border real estate development flow.

The impact of E-commerce on retail real estate in the UK

This article summarizes the main research findings from the first of a series of annual surveys conducted for the British Council of Shopping Centres. The study examines the changing pattern of retailing in the United Kingdom and provides an overview of key research from previous studies in both the U.K. and the United States. The main findings are then presented, including an examination of the impact of e-commerce on sales and rental values and on the future space and ownership / leasing requirements of U.K. retailers for 2000-2005. The impact on a shopping center in a case study town in the U.K. is also considered. The difficulties of isolating the impact of e-commerce from other forces for change in retailing are highlighted. In contrast to other viewpoints, the results show that e-commerce will not mean the death of conventional store-based U.K. retailing, although further benchmark research is needed.

The tenant as a customer: can good service improve real estate performance?

Customer Relationship Management (CRM) theory suggests that good customer service results in satisfied customers, who in turn are more likely to remain loyal and recommend the service provider to others. Proponents of good customer service for tenants claim that landlords should see a return on any investment in their customer service, in the form of enhanced real estate performance. This paper begins by reviewing research on customer service returns in other industries. Through consideration of the characteristics of real estate markets, the paper explains how factors such as (inter alia) lease terms, property market cycles, and property type, might determine the relationship between customer service and real estate performance. The paper concludes that further research is needed to isolate specific aspects of customer service that are most appreciated by customers. It suggests that the financial returns which accrue to landlords adopting a customer-focused approach might indeed be quantified, and suggests an appropriate method for such future research.

Soil management in relation to sustainable agriculture and ecosystem services

Requirements for research, practices and policies affecting soil management in relation to global food security are reviewed. Managing soil organic carbon (C) is central because soil organic matter influences numerous soil properties relevant to ecosystem functioning and crop growth. Even small changes in total C content can have disproportionately large impacts on key soil physical properties. Practices to encourage maintenance of soil C are important for ensuring sustainability of all soil functions. Soil is a major store of C within the biosphere – increases or decreases in this large stock can either mitigate or worsen climate change. Deforestation, conversion of grasslands to arable cropping and drainage of wetlands all cause emission of C; policies and international action to minimise these changes are urgently required. Sequestration of C in soil can contribute to climate change mitigation but the real impact of different options is often misunderstood. Some changes in management that are beneficial for soil C, increase emissions of nitrous oxide (a powerful greenhouse gas) thus cancelling the benefit. Research on soil physical processes and their interactions with roots can lead to improved and novel practices to improve crop access to water and nutrients. Increased understanding of root function has implications for selection and breeding of crops to maximise capture of water and nutrients. Roots are also a means of delivering natural plant-produced chemicals into soil with potentially beneficial impacts. These include biocontrol of soil-borne pests and diseases and inhibition of the nitrification process in soil (conversion of ammonium to nitrate) with possible benefits for improved nitrogen use efficiency and decreased nitrous oxide emission. The application of molecular methods to studies of soil organisms, and their interactions with roots, is providing new understanding of soil ecology and the basis for novel practical applications. Policy makers and those concerned with development of management approaches need to keep a watching brief on emerging possibilities from this fast-moving area of science. Nutrient management is a key challenge for global food production: there is an urgent need to increase nutrient availability to crops grown by smallholder farmers in developing countries. Many changes in practices including inter-cropping, inclusion of nitrogen-fixing crops, agroforestry and improved recycling have been clearly demonstrated to be beneficial: facilitating policies and practical strategies are needed to make these widely available, taking account of local economic and social conditions. In the longer term fertilizers will be essential for food security: policies and actions are needed to make these available and affordable to small farmers. In developed regions, and those developing rapidly such as China, strategies and policies to manage more precisely the necessarily large flows of nutrients in ways that minimise environmental damage are essential. A specific issue is to minimise emissions of nitrous oxide whilst ensuring sufficient nitrogen is available for adequate food production. Application of known strategies (through either regulation or education), technological developments, and continued research to improve understanding of basic processes will all play a part. Decreasing soil erosion is essential, both to maintain the soil resource and to minimise downstream damage such as sedimentation of rivers with adverse impacts on fisheries. Practical strategies are well known but often have financial implications for farmers. Examples of systems for paying one group of land users for ecosystem services affecting others exist in several parts of the world and serve as a model.

Bias or rationality? The case of UK commercial real estate investment

Purpose – The purpose of this paper is to test the hypothesis that investment decision making in the UK direct property market does not conform to the assumption of economic rationality underpinning portfolio theory. Design/methodology/approach – The developing behavioural real estate paradigm is used to challenge the idea that investor “man” is able to perform with economic rationality, specifically with reference to the analysis of the spatial dispersion of the entire UK “investible stock” and “investible locations” against observed spatial patterns of institutional investment. Location quotients are derived, combining different data sets. Findings – Considerably greater variation in institutional property holdings is found across the UK than would be expected given the economic and stock characteristics of local areas. This appears to provide evidence of irrationality (in the strict traditional economic sense) in the behaviour of institutional investors, with possible herding underpinning levels of investment that cannot be explained otherwise. Research limitations/implications – Over time a lack of distinction has developed between the cause and effect of comparatively low levels of development and institutional property investment across the regions. A critical examination of decision making and behaviour in practice could break this cycle, and could in turn promote regional economic growth. Originality/value – The entire “population” of observations is used to demonstrate the relationships between economic theory and investor performance exploring, for the first time, stock and local area characteristics.

Measuring European real estate investment performance: A comparison of different approaches

The performance of real estate investment markets is difficult to monitor because the constituent assets are heterogeneous, are traded infrequently and do not trade through a central exchange in which prices can be observed. To address this, appraisal based indices have been developed that use the records of owners for whom buildings are regularly re-valued. These indices provide a practical solution to the measurement problem, but have been criticised for understating volatility and not capturing market turning points in a timely manner. This paper evaluates alternative ‘Transaction Linked Indices’ that are estimated using an extension of the hedonic method for index construction and with Investment Property Databank data. The two types of indices are compared over Q4 2001 to Q4 2012 in order to examine whether movements in these indices are consistent. The Transaction Linked Indices show stronger growth and sharper declines than their appraisal based counterparts over the course of the cycle in different European markets and they are typically two to four times more volatile. However, they have some limitations; for instance, only country level indicators can be published in many cases owing to low trading volumes in the period studied.

The performance effects of composition changes on sector specific stock indices: The case of European listed real estate

This paper examines the impact of changes in the composition of real estate stock indices, considering companies both joining and leaving the indices. Stocks that are newly included not only see a short-term increase in their share price, but trading volumes increase in a permanent fashion following the event. This highlights the importance of indices in not only a benchmarking context but also in enhancing investor awareness and aiding liquidity. By contrast, as anticipated, the share prices of firms removed from indices fall around the time of the index change. The fact that the changes in share prices, either upwards for index inclusions or downwards for deletions, are generally not reversed, would indicate that the movements are not purely due to price pressure, but rather are more consistent with the information content hypothesis. There is no evidence, however, that index changes significantly affect the volatility of price changes or their operating performances as measured by their earnings per share.

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.

Treating the Tenant as a Customer: can good service improve real estate performance?

Customer Relationship Management (CRM) theory suggests that good customer service results in satisfied customers, who in turn are more likely to remain loyal and recommend the service provider to others. Applied to real estate, this theory implies that landlords should see a return on any investment in the service they give to tenants, in the form of increased lease renewal rates and fewer void periods, achieved without compromising rents. This paper examines determinants of occupier satisfaction, and investigates the relationship between occupier satisfaction and property performance, using measures such as capital growth, income return, lease renewal rates and total return. The analysis is based upon a pilot study using occupier satisfaction responses from around 2500 interviewees based in multi-tenanted offices, shopping centres and retail warehouses on out-of-town retail parks in the UK. The analysis is being extended to cover a larger sample for the author’s PhD. Part 1 of the analysis examines occupier satisfaction, whilst Part 2 considers its impact on property performance.

Cross-border capital flows into real estate

This study investigates the determinants of cross-border capital flows into direct real estate markets. In particular, it investigates how existing institutional, regulatory and real estate specific barriers affect cross-border real estate inflows and outflows in a sample of 24 developed and emerging countries, and whether investors seek out targets with lower barriers and regulatory arbitrage. We do not find evidence of significant cross-border institutional or regulatory arbitrage in the real estate market. However, real estate market liquidity is found to be the most important driver of cross-border flows. While many of the institutional barriers included in this analysis do not appear to impact the level of real estate inflows significantly, their presence tends to suppress real estate capital outflows to other countries. Overall, easy access to financial markets, a good economic environment and transparent real estate markets may enhance real estate outflows, while returns and the macroeconomy are found to enhance domestic real estate investment.