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.

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 influence of a decision support tool on real estate valuations

An appraisal task involves the rendering of market value, an unobservable and hypothetical construct. Direct feedback against this objective is typically not possible, so alternative feedback such as confirmation of previous appraised values may be employed. This may alter the appraiser’s perception of the valuation objective leading to divergence from the appraisal normative model. The real estate literature suggests appraisers have been susceptible to the influence of previous appraised values, often resulting in biased valuations. This research focuses on the efficacy of a decision support tool in eliminating or subduing this bias in the appraisal process.

The role of serviced offices in the corporate real estate supply chain

The paper analyses the evolving corporate real estate supply chain and the interaction of this evolution with emerging business models in the serviced office sector. An enhanced model of the corporate real estate portfolio is first presented incorporating vacant, alienated and transitory space. It is argued that the serviced office sector has evolved in response to an increasingly diverse corporate real estate portfolio. For the peripheral corporate real estate portfolio, the core serviced workspace product provides the ability to rapidly acquire high-quality workspace and associated support services on very flexible bases. Whilst it is arguably a beta product, the core workspace offer is now being augmented by managed office or back-to-back leases which enables clients to complement the advantages of serviced offices with a wider choice of premises. Joint venture business models are aligned with solutions to problems of vacant space.

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.

On the predictive content of leading indicators: the case of U.S. real estate markets

This paper employs a probit and a Markov switching model using information from the Conference Board Leading Indicator and other predictor variables to forecast the signs of future rental growth in four key U.S. commercial rent series. We find that both approaches have considerable power to predict changes in the direction of commercial rents up to two years ahead, exhibiting strong improvements over a naïve model, especially for the warehouse and apartment sectors. We find that while the Markov switching model appears to be more successful, it lags behind actual turnarounds in market outcomes whereas the probit is able to detect whether rental growth will be positive or negative several quarters ahead.

The impact of cross-border real estate investment on commercial real estate capitalisation rates

This study examines the impact of foreign real estate investment on the US office market capitalization rates. The geographic unit of analysis is MSA and the time period is 2001-2013. Drawing upon a database of commercial real estate transactions provided by Real Capital Analytics, we model the determinants of market capitalization rates with a particular focus on the significance of the proportion of market transactions involving foreign investors. We have employed several econometric techniques to explore the data, potential estimation biases, and test robustness of the results. The results suggest statistically significant effects of foreign investment across 38 US metro areas. It is estimated that, all else equal, a 100 basis points increase in foreign share of total investment in a US metropolitan office market causes about an 8 basis points decrease in the market cap rate.

Low-frequency volatility of real estate securities in relation to macroeconomic risk

Real estate securities have a number of distinct characteristics that differentiate them from stocks generally. Key amongst them is that under-pinning the firms are both real as well as investment assets. The connections between the underlying macro-economy and listed real estate firms is therefore clearly demonstrated and of heightened importance. To consider the linkages with the underlying macro-economic fundamentals we extract the ‘low-frequency’ volatility component from aggregate volatility shocks in 11 international markets over the 1990-2014 period. This is achieved using Engle and Rangel’s (2008) Spline-Generalized Autoregressive Conditional Heteroskedasticity (Spline-GARCH) model. The estimated low-frequency volatility is then examined together with low-frequency macro data in a fixed-effect pooled regression framework. The analysis reveals that the low-frequency volatility of real estate securities has strong and positive association with most of the macroeconomic risk proxies examined. These include interest rates, inflation, GDP and foreign exchange rates.

Does foreign investment affect US office real estate prices?

his article examines the impact of foreign real estate investment on U.S. office market capitalization rates. The geographic unit of analysis is MSA and the time period is 2001–2013. Drawing upon a database of commercial real estate transactions, the authors model the determinants of market capitalization rates with a particular focus on the significance of the proportion of market transactions involving foreign investors. Employing several econometric techniques to analyze the data, the results suggest statistically significant effects of foreign investment across 38 U.S. metro areas. It is estimated that, all else equal, a 100 basis point increase in foreign share of total investment in a U.S. metropolitan office market causes about an 8 basis point decrease in the market cap rate.

Do laws influence the cost of real estate brokerage services? A state fixed effects approach

A FTC-DOJ study argues that state laws and regulations may inhibit the unbundling of real estate brokerage services in response to new technology. Our data show that 18 states have changed laws in ways that promote unbundling since 2000. We model brokerage costs as measured by number of agents in a state-level annual panel vector autoregressive framework, a novel way of analyzing wasteful competition. Our findings support a positive relationship between brokerage costs and lagged house price and transactions. We find that change in full-service brokers responds negatively (by well over two percentage points per year) to legal changes facilitating unbundling

The blended approach to real estate allocations: performance implications of combining an exposure to German Spezialfonds with Global Listed Real Estate Securities

This paper seeks to increase the understanding of the performance implications for investors who choose to combine an unlisted real estate portfolio (in this case German Spezialfonds) with a (global) listed real estate element. We call this a “blended” approach to real estate allocations. For the avoidance of doubt, in this paper we are dealing purely with real estate equity (listed and unlisted) allocations, and do not incorporate real estate debt (listed or unlisted) or direct property into the process. A previous paper (Moss and Farrelly 2014) showed the benefits of the blended approach as it applied to UK Defined Contribution Pension Schemes. The catalyst for this paper has been the recent attention focused on German pension fund allocations, which have a relatively low (real estate) equity content, and a high bond content. We have used the MSCI Spezialfonds Index as a proxy for domestic German institutional real estate allocations, and the EPRA Global Developed Index as a proxy for a global listed real estate allocation. We also examine whether a rules based trading strategy, in this case Trend Following, can improve the risk adjusted returns above those of a simple buy and hold strategy for our sample period 2004-2015. Our findings are that by blending a 30% global listed portfolio with a 70% allocation (as opposed to a typical 100% weighting) to Spezialfonds, the real estate allocation returns increase from 2.88% p.a. to 5.42% pa. Volatility increases, but only to 6.53%., but there is a noticeable impact on maximum drawdown which increases to 19.4%. By using a Trend Following strategy raw returns are improved from 2.88% to 6.94% p.a. , The Sharpe Ratio increases from 1.05 to 1.49 and the Maximum Drawdown ratio is now only 1.83% compared to 19.4% using a buy and hold strategy . Finally, adding this (9%) real estate allocation to a mixed asset portfolio allocation typical for German pension funds there is an improvement in both the raw return (from 7.66% to 8.28%) and the Sharpe Ratio (from 0.91 to 0.98).