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”.

Uncertainty and feasibility studies: an Italian case study

Uncertainty affects all aspects of the property market but one area where the impact of uncertainty is particularly significant is within feasibility analyses. Any development is impacted by differences between market conditions at the conception of the project and the market realities at the time of completion. The feasibility study needs to address the possible outcomes based on an understanding of the current market. This requires the appraiser to forecast the most likely outcome relating to the sale price of the completed development, the construction costs and the timing of both. It also requires the appraiser to understand the impact of finance on the project. All these issues are time sensitive and analysis needs to be undertaken to show the impact of time to the viability of the project. The future is uncertain and a full feasibility analysis should be able to model the upside and downside risk pertaining to a range of possible outcomes. Feasibility studies are extensively used in Italy to determine land value but they tend to be single point analysis based upon a single set of “likely” inputs. In this paper we look at the practical impact of uncertainty in variables using a simulation model (Crystal Ball ©) with an actual case study of an urban redevelopment plan for an Italian Municipality. This allows the appraiser to address the issues of uncertainty involved and thus provide the decision maker with a better understanding of the risk of development. This technique is then refined using a “two-dimensional technique” to distinguish between “uncertainty” and “variability” and thus create a more robust model.

Last charge of the knights? Iraq, Afghanistan and the special relationship

At the heart of the ‘special relationship’ ideology, there is supposed to be a grand bargain. In exchange for paying the ‘blood price’ as America's ally, Britain will be rewarded with exceptional influence over American foreign policy and its strategic behaviour. Soldiers and statesman continue to articulate this idea. Since 9/11, the notion of Britain playing ‘Greece’ to America's ‘Rome’ gained new life thanks to Anglophiles on both sides of the Atlantic. One potent version of this ideology was that the more seasoned British would teach Americans how to fight ‘small wars’ in Iraq and Afghanistan, thereby bolstering their role as tutor to the superpower. Britain does derive benefits from the Anglo-American alliance and has made momentous contributions to the wars in Afghanistan and Iraq. Yet British solidarity and sacrifices have not purchased special influence in Washington. This is partly due to Atlanticist ideology, which sets Britain unrealistic standards by which it is judged, and partly because the notion of ‘special influence’ is misleading as it loses sight of the complexities of American policy-making. The overall result of expeditionary wars has been to strain British credibility in American eyes and to display its lack of consistent influence both over high policy and the design and execution of US military campaigns. While there may be good arguments in favour of the UK continuing its efforts in Afghanistan, the notion that the war fortifies Britain's vicarious world status is a dangerous illusion that leads to repeated overstretch and disappointment. Now that Britain is in the foothills of a strategic defence review, it is important that the British abandon this false consciousness.

“Financial alchemy” or a zero sum game? Real estate finance, securitisation and the UK property market

Following the US model, the UK has seen considerable innovation in the funding, finance and procurement of real estate in the last decade. In the growing CMBS market asset backed securitisations have included $2.25billion secured on the Broadgate office development and issues secured on Canary Wharf and the Trafford Centre regional mall. Major occupiers (retailer Sainsbury’s, retail bank Abbey National) have engaged in innovative sale & leaseback and outsourcing schemes. Strong claims are made concerning the benefits of such schemes – e.g. British Land were reported to have reduced their weighted cost of debt by 150bp as a result of the Broadgate issue. The paper reports preliminary findings from a project funded by the Corporation of London and the RICS Research Foundation examining a number of innovative schemes to identify, within a formal finance framework, sources of added value and hidden costs. The analysis indicates that many of the gains claimed conceal costs – in terms of market value of debt or flexibility of management – while others result from unusual firm or market conditions (for example utilising the UK long lease and the unusual shape of the yield curve). Nonetheless, there are real gains resulting from the innovations, reflecting arbitrage and institutional constraints in the direct (private) real estate market

Winners and losers from industry reforms in the developing world: experiences from the electricity and mining sectors

The reform of previously state-owned and operated industries in many Less Developed Countries (LDCs) provide contrary experiences to those in the developed world, which have generally had more equitable distributional impacts. The economic reform policies proposed by the so-called 'Washington Consensus' state that privatisation provides governments with opportunities to raise revenues through the sale of under-performing and indebted state industries, thereby reducing significant fiscal burdens, and, at the same time, facilitating influxes of foreign capital, skills and technology, with the aim of improving operations and a "trickle-down" of benefits. However, experiences in many LDCs over the last 15-20 years suggest that reform has not solved the problem of chronic public-sector debt, and that poverty and socio-economic inequalities have increased during this period of 'neo-liberal' economics. This paper does not seek to challenge the policies themselves, but rather argues that the context in which reform has often taken place is of fundamental significance. The industry-centric policy advice provided by the IFIs typically causes a 'lock-in' of inequitably distributed 'efficiency gains', providing minimal, if any, benefits to impoverished groups. These arguments are made using case study analysis from the electricity and mining sectors.

Eco-labeling, rents, sales prices and occupancy rates: do LEED and Energy Star labeled offices obtain multiple premiums?

Drawing upon an updated and expanded dataset of Energy Star and LEED labeled commercial offices, this paper investigates the effect of eco-labeling on rental rates, sale prices and occupancy rates. Using OLS and robust regression procedures, hedonic modeling is used to test whether the presence of an eco-label has a significant positive effect on rental rates, sale prices and occupancy rates. The study suggests that estimated coefficients can be sensitive to outlier treatment. For sale prices and occupancy rates, there are notable differences between estimated coefficients for OLS and robust regressions. The results suggest that both Energy Star and LEED offices obtain rental premiums of approximately 3%. A 17% sale price premium is estimated for Energy Star labeled offices but no significant sale price premium is estimated for LEED labeled offices. Surprisingly, no significant occupancy premium is estimated for Energy Star labeled offices and a negative occupancy premium is estimated for LEED labeled offices.

The accuracy of valuations: expectation and reality

The relationship between valuations and the subsequent sale price continues to be a matter of both theoretical and practical interest. This paper reports the analysis of over 700 property sales made during the 1974/90 period. Initial results imply an average under-valuation of 7% and a standard error of 18% across the sample. A number of techniques are applied to the data set using other variables such as the region, the type of property and the return from the market to explain the difference between the valuation and the subsequent sale price. The analysis reduces the unexplained error; the bias is fully accounted for and the standard error is reduced to 15.3%. This model finds that about 6% of valuations over-estimated the sale price by more than 20% and about 9% of the valuations under-estimated the sale prices by more than 20%. The results suggest that valuations are marginally more accurate than might be expected, both from consideration of theoretical considerations and from comparison with the equivalent valuation in equity markets.

Timing and the holding periods of institutional real estate

The literature on investors’ holding periods for equities and bonds suggest that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with short-term trading and hence shorter holding periods. High transaction costs and the perceived illiquidity of the real estate market leads to an expectation of longer holding periods. Further, work on depreciation and obsolescence might suggest that there is an optimal holding period. However, there is little empirical work in the area. In this paper, data from the Investment Property Databank are used to investigate sales rate and holding period for UK institutional real estate between 1981 and 1994. Sales rates are investigated using the Cox proportional hazards framework. The results show longer holding periods than those claimed by investors. There are marked differences by type of property and sales rates vary over time. Contemporaneous returns are positively associated with an increase in the rate of sale. The results shed light on investor behaviour.

Geographical variation in total and inorganic arsenic content of polished (white) rice

An extensive data set of total arsenic analysis for 901 polished (white) grain samples, originating from 10 countries from 4 continents, was compiled. The samples represented the baseline (i.e., not specifically collected from arsenic contaminated areas), and all were for market sale in major conurbations. Median total arsenic contents of rice varied 7-fold, with Egypt (0.04 mg/kg) and India (0.07 mg/kg) having the lowest arsenic content while the U.S. (0.25 mg/kg) and France (0.28 mg/kg) had the highest content. Global distribution of total arsenic in rice was modeled by weighting each country’s arsenic distribution by that country’s contribution to global production. A subset of 63 samples from Bangladesh, China, India, Italy, and the U.S. was analyzed for arsenic species. The relationship between inorganic arsenic content versus total arsenic content significantly differed among countries, with Bangladesh and India having the steepest slope in linear regression, and the U.S. having the shallowest slope. Using country-specific rice consumption data, daily intake of inorganic arsenic was estimated and the associated internal cancer risk was calculated using the U.S. Environmental Protection Agency (EPA) cancer slope. Median excess internal cancer risks posed by inorganic arsenic ranged 30-fold for the 5 countries examined, being 0.7 per 10,000 for Italians to 22 per 10,000 for Bangladeshis, when a 60 kg person was considered.

Does energy efficiency matter to home-buyers? An investigation of EPC ratings and transaction prices in England

This paper investigates whether energy performance ratings, as measured by mandatory Energy Performance Certificates (EPCs), are reflected in the sale prices of residential properties. This is the first large-scale empirical study of this topic in England involving 333,095 dwellings sold at least twice in the period from 1995 to 2012. Applying hedonic regression and an augmented repeat sales regression, we find a positive relationship between the energy efficiency rating of a dwelling and the transaction price per square metre. The price effects of superior energy performance tend to be higher for terraced dwellings and flats compared to detached and semi-detached dwellings. The evidence is less clear-cut for rates of house price growth but remains supportive of a positive association. Overall, the results of this study suggest that energy efficiency labels have a measurable and significant impact on house prices in England

Massive Open Online Courses and sustainability

Massive Open Online Courses (MOOCs) have become very popular among learners millions of users from around the world registered with leading platforms. There are hundreds of universities (and other organizations) offering MOOCs. However, sustainability of MOOCs is a pressing concern as MOOCs incur up front creation costs, maintenance costs to keep content relevant and on-going support costs to provide facilitation while a course is being run. At present, charging a fee for certification (for example Coursera Signature Track and FutureLearn Statement of Completion) seems a popular business model. In this paper, the authors discuss other possible business models and their pros and cons. Some business models discussed here are: Freemium model – providing content freely but charging for premium services such as course support, tutoring and proctored exams. Sponsorships – courses can be created in collaboration with industry where industry sponsorships are used to cover the costs of course production and offering. For example Teaching Computing course was offered by the University of East Anglia on the FutureLearn platform with the sponsorship from British Telecom while the UK Government sponsored the course Introduction to Cyber Security offered by the Open University on FutureLearn. Initiatives and Grants – The government, EU commission or corporations could commission the creation of courses through grants and initiatives according to the skills gap identified for the economy. For example, the UK Government’s National Cyber Security Programme has supported a course on Cyber Security. Similar initiatives could also provide funding to support relevant course development and offering. Donations – Free software, Wikipedia and early OER initiatives such as the MIT OpenCourseware accept donations from the public and this could well be used as a business model where learners could contribute (if they wish) to the maintenance and facilitation of a course. Merchandise – selling merchandise could also bring revenue to MOOCs. As many participants do not seek formal recognition (European Commission, 2014) for their completion of a MOOC, merchandise that presents their achievement in a playful way could well be attractive for them. Sale of supplementary material –supplementary course material in the form of an online or physical book or similar could be sold with the revenue being reinvested in the course delivery. Selective advertising – courses could have advertisements relevant to learners Data sharing – though a controversial topic, sharing learner data with relevant employers or similar could be another revenue model for MOOCs. Follow on events – the courses could lead to follow on summer schools, courses or other real-life or online events that are paid-for in which case a percentage of the revenue could be passed on to the MOOC for its upkeep. Though these models are all possible ways of generating revenue for MOOCs, some are more controversial and sensitive than others. Nevertheless unless appropriate business models are identified the sustainability of MOOCs would be problematic.

Liquidity and the drivers of search, due diligence and transaction times for UK commercial real estate investments

Trading commercial real estate involves a process of exchange that is costly and which occurs over an extended and uncertain period of time. This has consequences for the performance and risk of real estate investments. Most research on transaction times has occurred for residential rather than commercial real estate. We study the time taken to transact commercial real estate assets in the UK using a sample of 578 transactions over the period 2004 to 2013. We measure average time to transact from a buyer and seller perspective, distinguishing the search and due diligence phases of the process, and we conduct econometric analysis to explain variation in due diligence times between assets. The median time for purchase of real estate from introduction to completion was 104 days and the median time for sale from marketing to completion was 135 days. There is considerable variation around these times and results suggest that some of this variation is related to market state, type and quality of asset, and type of participants involved in the transaction. Our findings shed light on the drivers of liquidity at an individual asset level and can inform models that quantify the impact of uncertain time on market on real estate investment risk.

Assumptions of retail price strategy and price tactic decisions

This licentiate thesis sets out to analyse how a retail price decision frame can be understood. It is argued that it is possible to view price determination within retailing by determining the level of rationality and using behavioural theories. In this way, it is possible to use assumptions derived from economics and marketing to establish a decision frame. By taking a management perspective, it is possible to take into consideration how it is assumed that the retailer should strategically manage price decisions, which decisions might be assumed to be price decisions, and which decisions can be assumed to be under the control of the retailer. Theoretically, this licentiate thesis has its foundations in different assumptions about decision frames regarding the level of information collected, the goal of the decisions, and the outcomes of the decisions. Since the concepts that are to be analysed within this thesis are price decisions, the latter part of the theory discusses price decision in specific: sequential price decisions, at the point of the decision, and trade-offs when making a decision. Here, it is evident that a conceptual decision frame that is intended to illustrate price decisions includes several aspects: several decision alternatives and what assumptions of rationality that can be made in relation to the decision frame. A semi-structured literature review was conducted. As a result, it became apparent that two important things in the decision frame were unclear: time assumptions regarding the decisions and the amount of information that is assumed in relation to the different decision alternatives. By using the same articles that were used to adjust the decision frame, a topical study was made in order to determine the time specific assumptions, as well as the analytical level based on the assumed information necessary for individual decision alternatives. This, together with an experimental study, was necessary to be able to discuss the consequences of the rationality assumption. When the retail literature is analysed for the level of rationality and consequences of assuming certain assumptions of rationality, three main things becomes apparent. First, the level of rationality or the assumptions of rationality are seldom made or accounted for in the literature. In fact, there are indications that perfect and bounded rationality assumptions are used simultaneously within studies. Second, although bounded rationality is a recognised theoretical perspective, very few articles seem to use these assumptions. Third, since the outcome of a price decision seems to provide no incremental sale, it is questionable which assumptions of rationality that should be used. It might even be the case that no assumptions of rationality at all should be used. In a broader perspective, the findings from this licentiate thesis show that the assumptions of rationality within retail research is unclear. There is an imbalance between the perspectives used, where the main assumptions seem to be concentrated to perfect rationality. However, it is suggested that by clarifying which assumptions of rationality that is used and using bounded rationality assumptions within research would result in a clearer picture of the multifaceted price decisions that could be assumed within retailing. The theoretical contribution of this thesis mainly surround the identification of how the level of rationality provides limiting assumptions within retail research. Furthermore, since indications show that learning might not occur within this specific context it is questioned whether the basic learning assumption within bounded rationality should be used in this context.