Analysing UK real estate market forecast disagreement

Given the significance of forecasting in real estate investment decisions, this paper investigates forecast uncertainty and disagreement in real estate market forecasts. Using the Investment Property Forum (IPF) quarterly survey amongst UK independent real estate forecasters, these real estate forecasts are compared with actual real estate performance to assess a number of real estate forecasting issues in the UK over 1999-2004, including real estate forecast error, bias and consensus. The results suggest that real estate forecasts are biased, less volatile compared to market returns and inefficient in that forecast errors tend to persist. The strongest finding is that real estate forecasters display the characteristics associated with a consensus indicating herding.

The production and consumption of commercial real estate market forecasts

Whilst the vast majority of the research on property market forecasting has concentrated on statistical methods of forecasting future rents, this report investigates the process of property market forecast production with particular reference to the level and effect of judgemental intervention in this process. Expectations of future investment performance at the levels of individual asset, sector, region, country and asset class are crucial to stock selection and tactical and strategic asset allocation decisions. Given their centrality to investment performance, we focus on the process by which forecasts of rents and yields are generated and expectations formed. A review of the wider literature on forecasting suggests that there are strong grounds to expect that forecast outcomes are not the result of purely mechanical calculations.

Data dilemmas in forecasting European office market rents

This paper uses data provided by three major real estate advisory firms to investigate the level and pattern of variation in the measurement of historic real estate rental values for the main European office centres. The paper assesses the extent to which the data providing organizations agree on historic market performance in terms of returns, risk and timing and examines the relationship between market maturity and agreement. The analysis suggests that at the aggregate level and for many markets, there is substantial agreement on direction, quantity and timing of market change. However, there is substantial variability in the level of agreement among cities. The paper also assesses whether the different data sets produce different explanatory models and market forecast. It is concluded that, although disagreement on the direction of market change is high for many market, the different data sets often produce similar explanatory models and predict similar relative performance.

Expert judgement in the processes of commercial property market forecasting

In this paper, we investigate the role of judgement in the formation of forecasts in commercial property markets. The investigation is based on interview surveys with the majority of UK forecast producers, who are using a range of inputs and data sets to form models to predict an array of variables for a range of locations. The findings suggest that forecasts need to be acceptable to their users (and purchasers) and consequently forecasters generally have incentives to avoid presenting contentious or conspicuous forecasts. Where extreme forecasts are generated by a model, forecasters often engage in ‘self‐censorship’ or are ‘censored’ following in‐house consultation. It is concluded that the forecasting process is significantly more complex than merely carrying out econometric modelling, forecasts are mediated and contested within organisations and that impacts can vary considerably across different organizational contexts.

Expert judgement in the processes of commercial property market forecasting

In this paper we investigate the role of judgement in the formation of forecasts in commercial real estate markets. Based on interview surveys with the majority of forecast producers, we find that real estate forecasters are using a range of inputs and data sets to form models to predict an array of variables for a range of locations. The findings suggest that forecasts need to be acceptable to their users (and purchasers) and consequently forecasters generally have incentives to avoid presenting contentious or conspicuous forecasts. Where extreme forecasts are generated by a model, forecasters often engage in ‘self-censorship’ or are ‘censored’ following in-house consultation. It is concluded that the forecasting process is more complex than merely carrying out econometric modelling and that the impact of the influences within this process vary considerably across different organizational contexts.

Global observations and forecast skill

The impact of selected observing systems on forecast skill is explored using the European Centre for Medium-Range Weather Forecasts (ECMWF) 40-yr reanalysis (ERA-40) system. Analyses have been produced for a surface-based observing system typical of the period prior to 1945/1950, a terrestrial-based observing system typical of the period 1950-1979 and a satellite-based observing system consisting of surface pressure and satellite observations. Global prediction experiments have been undertaken using these analyses as initial states, and which are available every 6 h, for the boreal winters of 1990/1991 and 2000/2001 and the summer of 2000, using a more recent version of the ECMWF model. The results show that for 500-hPa geopotential height, as a representative field, the terrestrial system in the Northern Hemisphere extratropics is only slightly inferior to the control system, which makes use of all observations for the analysis, and is also more accurate than the satellite system. There are indications that the skill of the terrestrial system worsens slightly and the satellite system improves somewhat between 1990/1991 and 2000/2001. The forecast skill in the Southern Hemisphere is dominated by the satellite information and this dominance is larger in the latter period. The overall skill is only slightly worse than that of the Northern Hemisphere. In the tropics (20 degrees S-20 degrees N), using the wind at 850 and 250 hPa as representative fields, the information content in the terrestrial and satellite systems is almost equal and complementary. The surface-based system has very limited skill restricted to the lower troposphere of the Northern Hemisphere. Predictability calculations show a potential for a further increase in predictive skill of 1-2 d in the extratropics of both hemispheres, but a potential for a major improvement of many days in the tropics. As well as the Eulerian perspective of predictability, the storm tracks have been calculated from all experiments and validated for the extratropics to provide a Lagrangian perspective.

Ice supersaturation in the ECMWF integrated forecast system

A parametrization for ice supersaturation is introduced into the ECMWF Integrated Forecast System (IFS), compatible with the cloud scheme that allows partial cloud coverage. It is based on the simple, but often justifiable, diagnostic assumption that the ice nucleation and subsequent depositional growth time-scales are short compared to the model time step, thus supersaturation is only permitted in the clear-sky portion of the grid cell. Results from model integrations using the new scheme are presented, which is demonstrated to increase upper-tropospheric humidity, decrease high-level cloud cover and, to a much lesser extent, cloud ice amounts, all as expected from simple arguments. Evaluation of the relative distribution of supersaturated humidity amounts shows good agreement with the observed climatology derived from in situ aircraft observations. With the new scheme, the global distribution of frequency of occurrence of supersaturated regions compares well with remotely sensed microwave limb sounder (MLS) data, with the most marked errors of underprediction occurring in regions where the model is known to underpredict deep convection. Finally, it is also demonstrated that the new scheme leads to improved predictions of permanent contrail cloud over southern England, which indirectly implies upper-tropospheric humidity fields are better represented for this region.

Can wavelets improve the representation of forecast error covariances in variational data assimilation?

Two wavelet-based control variable transform schemes are described and are used to model some important features of forecast error statistics for use in variational data assimilation. The first is a conventional wavelet scheme and the other is an approximation of it. Their ability to capture the position and scale-dependent aspects of covariance structures is tested in a two-dimensional latitude-height context. This is done by comparing the covariance structures implied by the wavelet schemes with those found from the explicit forecast error covariance matrix, and with a non-wavelet- based covariance scheme used currently in an operational assimilation scheme. Qualitatively, the wavelet-based schemes show potential at modeling forecast error statistics well without giving preference to either position or scale-dependent aspects. The degree of spectral representation can be controlled by changing the number of spectral bands in the schemes, and the least number of bands that achieves adequate results is found for the model domain used. Evidence is found of a trade-off between the localization of features in positional and spectral spaces when the number of bands is changed. By examining implied covariance diagnostics, the wavelet-based schemes are found, on the whole, to give results that are closer to diagnostics found from the explicit matrix than from the nonwavelet scheme. Even though the nature of the covariances has the right qualities in spectral space, variances are found to be too low at some wavenumbers and vertical correlation length scales are found to be too long at most scales. The wavelet schemes are found to be good at resolving variations in position and scale-dependent horizontal length scales, although the length scales reproduced are usually too short. The second of the wavelet-based schemes is often found to be better than the first in some important respects, but, unlike the first, it has no exact inverse transform.

Evaluation of the Met Office global forecast model using Geostationary Earth Radiation Budget (GERB) data

Simulations of the top-of-atmosphere radiative-energy budget from the Met Office global numerical weather-prediction model are evaluated using new data from the Geostationary Earth Radiation Budget (GERB) instrument on board the Meteosat-8 satellite. Systematic discrepancies between the model simulations and GERB measurements greater than 20 Wm-2 in outgoing long-wave radiation (OLR) and greater than 60 Wm-2 in reflected short-wave radiation (RSR) are identified over the period April-September 2006 using 12 UTC data. Convective cloud over equatorial Africa is spatially less organized and less reflective than in the GERB data. This bias depends strongly on convective-cloud cover, which is highly sensitive to changes in the model convective parametrization. Underestimates in model OLR over the Gulf of Guinea coincide with unrealistic southerly cloud outflow from convective centres to the north. Large overestimates in model RSR over the subtropical ocean, greater than 50 Wm-2 at 12 UTC, are explained by unrealistic radiative properties of low-level cloud relating to overestimation of cloud liquid water compared with independent satellite measurements. The results of this analysis contribute to the development and improvement of parametrizations in the global forecast model.

A review of forecast error covariance statistics in atmospheric variational data assimilation. I: Characteristics and measurements of forecast error covariances