An investigation of the effect of eco-labeling on office occupancy rates

This paper investigates the extent to which clients were able to influence performance measurement appraisals during the downturn in commercial property markets that began in the UK during the second half of 2007. The sharp change in market sentiment produced speculation that different client categories were attempting to influence their appraisers in different ways. In particular, it was recognised that the requirement for open-ended funds to meet redemptions gave them strong incentives to ensure that their asset values were marked down to market. Using data supplied by Investment Property Databank, we demonstrate that, indeed, unlisted open ended funds experienced sharper drops in capital values than other fund types in the second half of 2007, after the market turning point. These differences are statistically significant and cannot simply be explained by differences in portfolio composition. Client influence on appraisal forms one possible explanation of the results observed: the different pressures on fund managers resulting in different appraisal outcomes.

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.

Office rent determinants: a hedonic panel analysis

It has been frequently observed that office markets are subject to particularly high fluctuations in rents and vacancy levels, thus exposing real estate investors to considerable risk regarding expected future income streams. This paper analyzes the determinants of office rents and their variability over time and across sub-markets to gain insight into the rent price formation and its stability across space and over time. No support is found for the single-market hypothesis which states that arbitrage opportunities effectively align real estate pricing schemes in various parts of city. Instead, the results suggest that the importance of hedonic pricing factors varies both over time and across submarkets.

Are local economic development incentives promoting job growth? An empirical case study

At a time when cities are competing with one another to attract or retain jobs within a globalizing economy, city governments are providing an array of financial incentives to stimulate job growth and retain existing jobs, particularly in high cost locations. This paper provides the first systematic and comprehensive analysis of datasets on economic development incentives in New York City over the last fifteen years. The evidence on job retention and creation is mixed. Although many companies do not meet their agreed-upon job targets in absolute terms, the evidence suggests that companies receiving subsidies outperform their respective industries in terms of employment growth, that is, the grow more, or decline less. We emphasize that this finding is difficult to interpret, since firms receiving incentives may not be representative of the industry as a whole. In other words, their above-average performance may simply reflect the fact that the Economic Development Corporation (EDC) selects economically promising companies within manufacturing (or other industries) when granting incentives. At the same time, it is also possible that receiving incentives helps these companies to become stronger.

Hedging effectiveness of total returns swaps: application to the Japanese market

The development of the real estate swap market offers many opportunities for investors to adjust the exposure of their portfolios to real estate. A number of OTC transactions have been observed in markets around the world. In this paper we examine the Japanese commercial real estate market from the point of view of an investor holding a portfolio of properties seeking to reduce the portfolio exposure to the real estate market by swapping an index of real estate for LIBOR. This paper explores the practicalities of hedging portfolios comprising small numbers of individual properties against an appropriate index. We use the returns from 74 properties owned by Japanese Real Estate Investment Trusts over the period up to September 2007. The paper also discusses and applies the appropriate stochastic processes required to model real estate returns in this application and presents alternative ways of reporting hedging effectiveness. We find that the development of the derivative does provide the capacity for hedging market risk but that the effectiveness of the hedge varies considerably over time. We explore the factors that cause this variability.

Unlisted property funds and the emerging property markets

This paper sets out to describe the changing nature of global property investment, to provide background information regarding the nature of unlisted property funds and their managers and investors, and especially the role played by unlisted property funds in facilitating cross-border investing. In particular, it focuses on the development of unlisted funds as intermediary structures carrying institutional capital from developed to developing markets. It presents the results of new research by UK research firm Property Funds Research (PFR) and the University of Reading which explores the extent to which this new vehicle has been effective in delivering capital to emerging markets. The research relates the number of funds targetting particular countries and to population and GDP per capita. It finds that there is a very strong relationship between the popularity of a country for investment through this vehicle format and these independent variables. More interesting, perhaps, is the identification of outlier countries where the amount of investment is significantly less - or greater - than that predicted by population and GDP per capita.

The appraisal of data centres: deconstructing the cash flow

This paper analyses the appraisal of a specialized form of real estate - data centres - that has a unique blend of locational, physical and technological characteristics that differentiate it from conventional real estate assets. Market immaturity, limited trading and a lack of pricing signals enhance levels of appraisal uncertainty and disagreement relative to conventional real estate assets. Given the problems of applying standard discounted cash flow, an approach to appraisal is proposed that uses pricing signals from traded cash flows that are similar to the cash flows generated from data centres. Based upon ‘the law of one price’, it is assumed that two assets that are expected to generate identical cash flows in the future must have the same value now. It is suggested that the expected cash flow of assets should be analysed over the life cycle of the building. Corporate bond yields are used to provide a proxy for the appropriate discount rates for lease income. Since liabilities are quite diverse, a number of proxies are suggested as discount and capitalisation rates including indexed-linked, fixed interest and zero-coupon bonds.

Urban conservation areas and sustainable development: exploring the relationship

With increasing emphasis being placed on concentrating development in urban areas and improving the quality of life in British cities and towns, the importance of accommodating necessary development without compromising the valued heritage and architectural quality of urban areas is now becoming central to sustainable urban development. Urban conservation policy and practice has the potential to contribute to this and other aspects of sustainability. This paper explores this contribution and develops an analytical framework which draws out the key linkages between conservation area policy and sustainable development. The framework is then used to research the potential and actual contribution of urban conservation policy and practice in England, using a selective survey and two case studies (i.e. Winchester and Basingstoke). The main conclusions from the research are that: Conservation area policy can make a significant contribution to the principles of sustainable development; Most local planning authorities in England have not fully woken-up to this potential and have not developed policies or practices to address it; and Urban conservation policy needs to develop a more proactive approach in which local planning authorities actively guide and encourage new development with regard to use, design, layout, methods of construction, materials and energy efficiency.

The uncertainty of valuation

Valuation is often said to be “an art not a science” but this relates to the techniques employed to calculate value not to the underlying concept itself. Valuation is the process of estimating price in the market place. Yet, such an estimation will be affected by uncertainties. Uncertainty in the comparable information available; uncertainty in the current and future market conditions and uncertainty in the specific inputs for the subject property. These input uncertainties will translate into an uncertainty with the output figure, the valuation. The degree of the uncertainties will vary according to the level of market activity; the more active a market, the more credence will be given to the input information. In the UK at the moment the Royal Institution of Chartered Surveyors (RICS) is considering ways in which the uncertainty of the output figure, the valuation, can be conveyed to the use of the valuation, but as yet no definitive view has been taken. One of the major problems is that Valuation models (in the UK) are based upon comparable information and rely upon single inputs. They are not probability based, yet uncertainty is probability driven. In this paper, we discuss the issues underlying uncertainty in valuations and suggest a probability-based model (using Crystal Ball) to address the shortcomings of the current model.

Asymmetric response of demand-supply mismatch to investor's sentiment

We look through both the demand and supply side information to understand dynamics of price determination in the real estate market and examine how accurately investors’ attitudes predict the market returns and thereby flagging off extent of any demand-supply mismatch. Our hypothesis is based on the possibility that investors’ call for action in terms of their buy/sell decision and adjustment in reservation/offer prices may indicate impending demand-supply imbalances in the market. In the process, we study several real estate sectors to inform our analysis. The timeframe of our analysis (1995-2010) allows us to observe market dynamics over several economic cycles and in various stages of those cycles. Additionally, we also seek to understand how investors’ attitude or the sentiment affects the market activity over the cycles through asymmetric responses. We test our hypothesis variously using a number of measures of market activity and attitude indicators within several model specifications. The empirical models are estimated using Vector Error Correction framework. Our analysis suggests that investors’ attitude exert strong and statistically significant feedback effects in price determination. Moreover, these effects do reveal heterogeneous responses across the real estate sectors. Interestingly, our results indicate the asymmetric responses during boom, normal and recessionary periods. These results are consistent with the theoretical underpinnings.

Dynamic analysis of house price diffusion across Asian financial centres

The aim of this paper is to explore effects of macroeconomic variables on house prices and also, the lead-lag relationships of real estate markets to examine house price diffusion across Asian financial centres. The analysis is based on the Global Vector Auto-Regression (GVAR) model estimated using quarterly data for six Asian financial centres (Hong Kong, Tokyo, Seoul, Singapore, Taipei and Bangkok) from 1991Q1 to 2011Q2. The empirical results indicate that the global economic conditions play significant roles in shaping house price movements across Asian financial centres. In particular, a small open economy that heavily relies on international trade such as – Singapore and Tokyo - shows positive correlations between economy’s openness and house prices, consistent with the Balassa-Samuelson hypothesis in international trade. However, region-specific conditions do play important roles as determinants of house prices, partly due to restrictive housing policies and demand-supply imbalances, as found in Singapore and Bangkok.

Performance drivers of UK unlisted property funds

An unlisted property fund is a private investment vehicle which aims to provide direct property total returns and may also employ financial leverage which will accentuate performance. They have become a far more prevalent institutional property investment conduit since the early 2000’s. Investors have been primarily attracted to them due to the ease of executing a property exposure, both domestically and internationally, and for their diversification benefits given the capital intensive nature of constructing a well diversified commercial property investment portfolio. However, despite their greater prominence there has been little academic research conducted on the performance and risks of unlisted property fund investments. This can be attributed to a paucity of available data and limited time series where it exists. In this study we have made use of a unique dataset of institutional UK unlisted non-listed property funds over the period 2003Q4 to 2011Q4, using a panel modelling framework in order to determine the key factors which impact on fund performance. The sample provided a rich set of unlisted property fund factors including market exposures, direct property characteristics and the level of financial leverage employed. The findings from the panel regression analysis show that a small number of variables are able to account for the performance of unlisted property funds. These variables should be considered by investors when assessing the risk and return of these vehicles. The impact of financial leverage upon the performance of these vehicles through the recent global financial crisis and subsequent UK commercial property market downturn was also studied. The findings indicate a significant asymmetric effect of employing debt finance within unlisted property funds.

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.

Aligning asset allocation and real estate investment: some lessons from the last cycle

Asset allocation is concerned with the development of multi--‐asset portfolio strategies that are likely to meet an investor’s objectives based on the interaction of expected returns, risk, correlation and implementation from a range of distinct asset classes or beta sources. Challenges associated with the discipline are often particularly significant in private markets. Specifically, composition differences between the ‘index’ or ‘benchmark’ universe and the investible universe mean that there can often be substantial and meaningful deviations between the investment characteristics implied in asset allocation decisions and those delivered by investment teams. For example, while allocation decisions are often based on relatively low--‐risk diversified real estate ‘equity’ exposure, implementation decisions frequently include exposure to higher risk forms of the asset class as well as investments in debt based instruments. These differences can have a meaningful impact on the contribution of the asset class to the overall portfolio and, therefore, lead to a potential misalignment between asset allocation decisions and implementation. Despite this, the key conclusion from this paper is not that real estate investors should become slaves to a narrowly defined mandate based on IPD / NCREIF or other forms of benchmark replication. The discussion suggests that such an approach would likely lead to the underutilization of real estate in multi--‐asset portfolio strategies. Instead, it is that to achieve asset allocation alignment, real estate exposure should be divided into multiple pools representing distinct forms of the asset class. In addition, the paper suggests that associated investment guidelines and processes should be collaborative and reflect the portfolio wide asset allocation objectives of each pool. Further, where appropriate they should specifically target potential for ‘additional’ beta or, more marginally, ‘alpha’.

Urban Growth Boundaries and their impact on land prices

Investigation of the effects of Urban Growth Boundaries (UGB) on land prices are restricted by a lack of good land market data. However, undeveloped land transactions at the urban fringe of the Melbourne metropolitan area in Australia are recorded in a data set that enables exploration of the impact of its UGB. Estimation can take account of endogeneity issues, while controlling for policy anticipation effects and other potential influences on land prices. OLS and instrumental variable estimates indicate that land prices rose substantially inside the UGB after its enactment in 2003 but did not rise much outside of it.