Change & flexibility: the role of serviced office space in corporate real estate portfolios and office markets

With the increasing pace of change, organisations have sought new real estate solutions which provide greater flexibility. What appears to be required is not flexibility for all uses but appropriate flexibility for the volatile, risky and temporal part of a business. This is the essence of the idea behind the split between the core and periphery portfolio. The serviced office has emerged to fill the need for absolute flexibility. This market is very diverse in terms of the product, services and target market. It has grown and gained credibility with occupiers and more recently with the property investment market. Occupiers similarly use this space in a variety of ways. Some solely occupy serviced space while others use it to complement their more permanent space. It therefore appears that the market is fulfilling the role of providing periphery space for at least some of the occupiers. In all instances the key to this space is a focus on financial and tenurial flexibility which is not provided by other types of business space offered.

Corporate real estate management in the retail sector: a study of the relationship between the management of the corporate real estate and corporate performance

Retail organisations have often been cited as being at the forefront of corporate real estate management. This research found that the retail sector can be characterised by diversity both in terms of the degree to which organisations are vertically integrated and in terms of the range of modes of retailing they engage in. This in turn led to highly diverse real estate portfolios. Given this diversity it may be surprising that the over riding strategy which the vast majority of sample firms adopted was focused on supporting the core retail activity. However the way in which they implement this strategy, again reflected the diversity in the sector. In terms of the future, the senior real estate managers were focusing on the medium term particularly looking at the way change would impact their functional strategy. This study provides a snap-shot of current practice and contributes to the debate however it also recognised that there is a need to answer the more fundamental questions.

Occupational futures? Divesting real estate and corporate PFI

Property ownership can tie up large amounts of capital and management energy that business could employ more productively elsewhere. Competitive pressures, accounting changes and increasingly sophisticated occupier requirements are building demand for new and innovative ways to satisfy corporate occupation needs. The investment climate is also changing. Falling interest rates and falling inflation can be expected to undermine returns from the traditional FRI lease. In future, investment returns will be more dependent on active and innovative management geared to the needs of occupiers on whom income depends. Occupier and investor interests, therefore, look set to coincide, but unlocking the potential for both parties will depend on developing new finance and investment vehicles that align their respective needs. In the UK, examples include PFI in the public sector and off-balance sheet financing in the private sector. In the USA, ���synthetic lease��� structures have also become popular. Growing investment market experience in assessing risks and returns suggests scope for further innovative arrangements in the corporate sector. But how can such arrangements be structured? What are the risks, drivers and barriers?

Annual CREMRU-JCI survey of corporate real estate practices in Europe and North America: 1993-2002

The annual survey of corporate real estate practices has been conducted by CREMRU since 1993 and in collaboration with Johnsons Controls Inc. since 1997. This year the survey forms the first stage of a broader research project: International Survey of Corporate Real Estate Practices: longitudinal study 1993-2002, being undertaken for the Innovative Construction Research Centre at the University of Reading, funded by the Engineering and Physical Sciences Research Council. The survey has been endorsed by CoreNet, the leading professional association concerned with corporate real estate, which opened it to a wider audience. This summary of the ten annual surveys focuses on the incidence of corporate real estate management (CREM) policies, functions and activities, as well as the assessment of knowledge or skills relevant to the CREM function in the future. Both are of vital interest to educational institutions concerned with this field, as well as the personnel and training functions within organisations concerned with better management of their property.

Direct investment in real estate

Momentum strategies have the potential to generate extra profits in private real estate markets. Tests of a variety of frequencies of portfolio reweighting identify periods of winner and loser performance. There are strong potential gains from momentum strategies that are based on prior returns over a 6- to 12-month period. Whether these gains are attainable for real-world investors depends on transaction costs, but some momentum strategies do produce net excess returns. The findings hold even if returns are unsmoothed to reflect underlying market prices.

Depreciation and its impact on the total return of UK commercial real estate, 1994-2003

Depreciation is a key element of understanding the returns from and price of commercial real estate. Understanding its impact is important for asset allocation models and asset management decisions. It is a key input into well-constructed pricing models and its impact on indices of commercial real estate prices needs to be recognised. There have been a number of previous studies of the impact of depreciation on real estate, particularly in the UK. Law (2004) analysed all of these studies and found that the seemingly consistent results were an illusion as they all used a variety of measurement methods and data. In addition, none of these studies examined impact on total returns; they examined either rental value depreciation alone or rental and capital value depreciation. This study seeks to rectify this omission, adopting the best practice measurement framework set out by Law (2004). Using individual property data from the UK Investment Property Databank for the 10-year period between 1994 and 2003, rental and capital depreciation, capital expenditure rates, and total return series for the data sample and for a benchmark are calculated for 10 market segments. The results are complicated by the period of analysis which started in the aftermath of the major UK real estate recession of the early 1990s, but they give important insights into the impact of depreciation in different segments of the UK real estate investment market.

Decision theory and real estate development: a note on uncertainty

Real estate development appraisal is a quantification of future expectations. The appraisal model relies upon the valuer/developer having an understanding of the future in terms of the future marketability of the completed development and the future cost of development. In some cases the developer has some degree of control over the possible variation in the variables, as with the cost of construction through the choice of specification. However, other variables, such as the sale price of the final product, are totally dependent upon the vagaries of the market at the completion date. To try to address the risk of a different outcome to the one expected (modelled) the developer will often carry out a sensitivity analysis on the development. However, traditional sensitivity analysis has generally only looked at the best and worst scenarios and has focused on the anticipated or expected outcomes. This does not take into account uncertainty and the range of outcomes that can happen. A fuller analysis should include examination of the uncertainties in each of the components of the appraisal and account for the appropriate distributions of the variables. Similarly, as many of the variables in the model are not independent, the variables need to be correlated. This requires a standardised approach and we suggest that the use of a generic forecasting software package, in this case Crystal Ball, allows the analyst to work with an existing development appraisal model set up in Excel (or other spreadsheet) and to work with a predetermined set of probability distributions. Without a full knowledge of risk, developers are unable to determine the anticipated level of return that should be sought to compensate for the risk. This model allows the user a better understanding of the possible outcomes for the development. Ultimately the final decision will be made relative to current expectations and current business constraints, but by assessing the upside and downside risks more appropriately, the decision maker should be better placed to make a more informed and ���better���.

Real estate capital flows and transitional economies

reign real estate capital was a major source of financing domestic property market office construction in Central Europe after the fall of the Berlin Wall in 1989. During the 1990s, over 800 office buildings were either newly constructed or refurbished in Budapest, Prague and Warsaw. The primary focus of this analysis is explaining the spatial construction and redevelopment patterns of the post-1989 office buildings in these cities. Secondarily, we analyze the correlation of foreign direct investment flows to annual construction of office buildings. We seek to explain the location of new or refurbished office buildings in the central business district (CBD) or in non-CBD locations in terms of the effect of time, size of property and other variables, and test whether there is a positive correlation relationship of foreign direct investment flows and new office construction or refurbishment. Integrating relevant foreign direct investment (FDI), economic geography and property theories in the research, the authors attempt to bridge existing gaps in the literature.

Forecasting UK real estate cycle phases with leading indicators: a probit approach

This paper examines the significance of widely used leading indicators of the UK economy for predicting the cyclical pattern of commercial real estate performance. The analysis uses monthly capital value data for UK industrials, offices and retail from the Investment Property Databank (IPD). Prospective economic indicators are drawn from three sources namely, the series used by the US Conference Board to construct their UK leading indicator and the series deployed by two private organisations, Lombard Street Research and NTC Research, to predict UK economic activity. We first identify turning points in the capital value series adopting techniques employed in the classical business cycle literature. We then estimate probit models using the leading economic indicators as independent variables and forecast the probability of different phases of capital values, that is, periods of declining and rising capital values. The forecast performance of the models is tested and found to be satisfactory. The predictability of lasting directional changes in property performance represents a useful tool for real estate investment decision-making.

Re-thinking commercial real estate market segmentation

Investments in direct real estate are inherently difficult to segment compared to other asset classes due to the complex and heterogeneous nature of the asset. The most common segmentation in real estate investment analysis relies on property sector and geographical region. In this paper, we compare the predictive power of existing industry classifications with a new type of segmentation using cluster analysis on a number of relevant property attributes including the equivalent yield and size of the property as well as information on lease terms, number of tenants and tenant concentration. The new segments are shown to be distinct and relatively stable over time. In a second stage of the analysis, we test whether the newly generated segments are able to better predict the resulting financial performance of the assets than the old dichotomous segments. Applying both discriminant and neural network analysis we find mixed evidence for this hypothesis. Overall, we conclude from our analysis that each of the two approaches to segmenting the market has its strengths and weaknesses so that both might be applied gainfully in real estate investment analysis and fund management.

European CMBS pricing: bond, mortgage and real estate characteristics

The recent global economic crisis is often associated with the development and pricing of mortgage-backed securities (i.e. MBSs) and underlying products (i.e. sub-prime mortgages). This work uses a rich database of MBS issues and represents the first attempt to price commercial MBSs (i.e. CMBSs) in the European market. Our results are consistent with research carried out in the US market and we find that bond-, mortgage-, real estate-related and multinational characteristics show different degrees of significance in explaining European CMBS spreads at issuance. Multiple linear regression analysis using a databank of CMBSs issued between 1997 and 2007 indicates a strong relationship with bond-related factors, followed by real estate and mortgage market conditions. We also find that multinational factors are significant, with country of issuance, collateral location and access to more liquid markets all being important in explaining the cost of secured funding for real estate companies. As floater coupon tranches tend to be riskier and exhibit higher spreads, we also estimate a model using this sub-set of data and results hold, hence reinforcing our findings. Finally, we estimate our model for both tranches A and B and find that real estate factors become relatively more important for the riskier investment products.