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.

The impact of country risk on international real estate returns

Commercial real estate investors have well-established methods to assess the risks of a property investment in their home country. However, when the investment decision is overseas another dimension of uncertainty overlays the analysis. This additional dimension, typically called country risk, encompasses the uncertainty of achieving expected financial results solely due to factors relating to the investment’s location in another country. However, very little has been done to examine the effects of country risk on international real estate returns, even though in international investment decisions considerations of country risk dominate asset investment decisions. This study extends the literature on international real estate diversification by empirically estimating the impact of country risk, as measured by Euromoney, on the direct real estate returns of 15 countries over the period 1998-2004, using a pooled regression analysis approach. The results suggest that country risk data may help investor’s in their international real estate decisions since the country risk data shows a significant and consistent impact on real estate return performance.

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.

Gauging the investment potential of international real estate markets

Investing in real estate markets overseas means venturing into the unknown, where you meet unfamiliar political and economic environments, unstable currencies, strange cultures and languages, and so although the advantages of international diversification might appear attractive, the risks of international investment must not be overlooked. However, capital markets are becoming global markets, and commercial real estate markets are no exception, accordingly despite the difficulties posed by venturing overseas no investor can overlook the potential international investment holds out. Thus, what strategies are appropriate for capitalising on this potential? Three issues must be considered: (1) the potential of the countries real estate market in general; (2) the potential of the individual market sectors; and (3) the investment process itself. Although each step in foreign real estate investment is critical, the initial assessment of opportunities is especially important. Various methods can be used to achieve this but a formal and systematic analysis of aggregate market potential should prove particularly fruitful. The work reported here, therefore, develops and illustrates such a methodology for the over 50 international real estate markets.

Real option pricing in mixed-use development projects

The application of real options theory to commercial real estate has developed rapidly during the last 15 Years. In particular, several pricing models have been applied to value real options embedded in development projects. In this study we use a case study of a mixed use development scheme and identify the major implied and explicit real options available to the developer. We offer the perspective of a real market application by exploring different binomial models and the associated methods of estimating the crucial parameter of volatility. We include simple binomial lattices, quadranomial lattices and demonstrate the sensitivity of the results to the choice of inputs and method.

Techniques for image analysis of movement of juveniles of root-knot nematodes encumbered with Pasteuria penetrans spores

Root-knot nematodes (Meloidogyne spp.) are the most significant plant-parasitic nematodes that damage many crops all over the world. The free-living second stage juvenile (J2) is the infective stage that enters plants. The J2s move in the soil water films to reach the root zone. The bacterium Pasteuria penetrans is an obligate parasite of root-knot nematodes, is cosmopolitan, frequently encountered in many climates and environmental conditions and is considered promising for the control of Meloidogyne spp. The infection potential of P. penetrans to nematodes is well studied but not the attachment effects on the movement of root-knot nematode juveniles, image analysis techniques were used to characterize movement of individual juveniles with or without P. penetrans spores attached to their cuticles. Methods include the study of nematode locomotion based on (a) the centroid body point, (b) shape analysis and (c) image stack analysis. All methods proved that individual J2s without P. penetrans spores attached have a sinusoidal forward movement compared with those encumbered with spores. From these separate analytical studies of encumbered and unencumbered nematodes, it was possible to demonstrate how the presence of P. penetrans spores on a nematode body disrupted the normal movement of the nematode.

Fine root turnover

Fine roots constitute an interface between plants and soils and thus play a crucial part in forest carbon, nutrient and water cycles. Their continuous growth and dieback, often termed turnover of fine roots, may constitute a major carbon input to soils and significantly contribute to belowground carbon cycle. For this reason, it is of importance to accurately estimate not only the standing biomass of fine roots, but also its rate of turnover. To date, no direct and reliable method of measuring fine root turnover exists. The main reason for this is that the two component processes of root turnover, namely growth and dieback of fine roots, nearly always happen in the same place and at the same time. Further, the estimation of fine root turnover is complicated by the inaccessibility of tree root systems, its labour intensiveness and is often compounded by artefacts created by soil disturbance. Despite the fact that the elucidation of the patterns and controls of forest fine root turnover is of utmost importance for the development of realistic carbon cycle models, our knowledge of the contribution of fine root turnover to carbon and nutrient cycles in forests remains uncertain. This chapter will detail all major methods currently used for estimating fine root turnover and highlight their advantages, as well as drawbacks.

Real estate portfolio construction and estimation risk

The use of MPT in the construction real estate portfolios has two serious limitations when used in an ex-ante framework: (1) the intertemporal instability of the portfolio weights and (2) the sharp deterioration in performance of the optimal portfolios outside the sample period used to estimate asset mean returns. Both problems can be traced to wide fluctuations in sample means Jorion (1985). Thus the use of a procedure that ignores the estimation risk due to the uncertain in mean returns is likely to produce sub-optimal results in subsequent periods. This suggests that the consideration of the issue of estimation risk is crucial in the use of MPT in developing a successful real estate portfolio strategy. Therefore, following Eun & Resnick (1988), this study extends previous ex-ante based studies by evaluating optimal portfolio allocations in subsequent test periods by using methods that have been proposed to reduce the effect of measurement error on optimal portfolio allocations.

Portfolio size and the reduction of dispersion: the case of the United Kingdom commercial real estate market

This paper investigates the potential benefits and limitations of equal and value-weighted diversification using as the example the UK institutional property market. To achieve this it uses the largest sample (392) of actual property returns that is currently available, over the period 1981 to 1996. To evaluate these issues two approaches are adopted; first, an analysis of the correlations within the sectors and regions and secondly simulations of property portfolios of increasing size constructed both naively and with value-weighting. Using these methods it is shown that the extent of possible risk reduction is limited because of the high positive correlations between assets in any portfolio, even when naively diversified. It is also shown that portfolios exhibit high levels of variability around the average risk, suggesting that previous work seriously understates the number of properties needed to achieve a satisfactory level of diversification. The results have implications for the development and maintenance of a property portfolio because they indicate that the achievable level of risk reduction depends upon the availability of assets, the weighting system used and the investor’s risk tolerance.

Fuzzy analysis: a vague way of dealing with uncertainty in real estate analysis?

Risk and uncertainty are, to say the least, poorly considered by most individuals involved in real estate analysis - in both development and investment appraisal. Surveyors continue to express 'uncertainty' about the value (risk) of using relatively objective methods of analysis to account for these factors. These methods attempt to identify the risk elements more explicitly. Conventionally this is done by deriving probability distributions for the uncontrolled variables in the system. A suggested 'new' way of "being able to express our uncertainty or slight vagueness about some of the qualitative judgements and not entirely certain data required in the course of the problem..." uses the application of fuzzy logic. This paper discusses and demonstrates the terminology and methodology of fuzzy analysis. In particular it attempts a comparison of the procedures with those used in 'conventional' risk analysis approaches and critically investigates whether a fuzzy approach offers an alternative to the use of probability based analysis for dealing with aspects of risk and uncertainty in real estate analysis

The development of a real-time PCR to detect pathogenic Leptospira species in kidney tissue

A LightCycler(R) real-time PCR hybridization probe-based assay that detects a conserved region of the 16S rRNA gene of pathogenic but not saprophytic Leptospira species was developed for the rapid detection of pathogenic leptospires directly from processed tissue samples. In addition, a differential PCR specific for saprophytic leptospires and a control PCR targeting the porcine beta-actin gene were developed. To assess the suitability of these PCR methods for diagnosis, a trial was performed on kidneys taken from adult pigs with evidence of leptospiral infection, primarily a history of reproductive disease and serological evidence of exposure to pathogenic leptospires (n = 180) and aborted pig foetuses (n = 24). Leptospire DNA was detected by the 'pathogenic' specific PCR in 25 tissues (14%) and the control beta-actin PCR was positive in all 204 samples confirming DNA was extracted from all samples. No leptospires were isolated from these samples by culture and no positives were detected with the 'saprophytic' PCR. In a subsidiary experiment, the 'pathogenic' PCR was used to analyse kidney samples from rodents (n = 7) collected as part of vermin control in a zoo, with show animals with high microagglutination titres to Leptospira species, and five were positive. Fifteen PCR amplicons from 1 mouse, 2 rat and 14 pig kidney samples, were selected at random from positive PCRs (n = 30) and sequenced. Sequence data indicated L. interrogans DNA in the pig and rat samples and L. inadai DNA, which is considered of intermediate pathogenicity, in the mouse sample. The only successful culture was from this mouse kidney and the isolate was confirmed to be L. inadai by classical serology. These data suggest this suite of PCRs is suitable for testing for the presence of pathogenic leptospires in pig herds where abortions and infertility occur and potentially in other animals such as rodents. Crown Copyright (C) 2007 Published by Elsevier Ltd. All rights reserved.

Fine-root turnover rates of European forests revisited: an analysis of data from sequential coring and ingrowth cores

Background and Aims Forest trees directly contribute to carbon cycling in forest soils through the turnover of their fine roots. In this study we aimed to calculate root turnover rates of common European forest tree species and to compare them with most frequently published values. Methods We compiled available European data and applied various turnover rate calculation methods to the resulting database. We used Decision Matrix and Maximum-Minimum formula as suggested in the literature. Results Mean turnover rates obtained by the combination of sequential coring and Decision Matrix were 0.86 yr−1 for Fagus sylvatica and 0.88 yr−1 for Picea abies when maximum biomass data were used for the calculation, and 1.11 yr−1 for both species when mean biomass data were used. Using mean biomass rather than maximum resulted in about 30 % higher values of root turnover. Using the Decision Matrix to calculate turnover rate doubled the rates when compared to the Maximum-Minimum formula. The Decision Matrix, however, makes use of more input information than the Maximum-Minimum formula. Conclusions We propose that calculations using the Decision Matrix with mean biomass give the most reliable estimates of root turnover rates in European forests and should preferentially be used in models and C reporting.

Measuring variation in potato roots in both field and glasshouse: the search for useful yield predictors and a simple screen for root traits

Aims Potatoes have an inadequate rooting system for efficient acquisition of water and minerals and use disproportionate amounts of irrigation and fertilizer. This research determines whether significant variation in rooting characteristics of potato exists, which characters correlate with final yield and whether a simple screen for rooting traits could be developed. Methods Twenty-eight genotypes of Solanum tuberosum groups Tuberosum and Phureja were grown in the field; eight replicate blocks to final harvest, while entire root systems were excavated from four blocks. Root classes were categorised and measured. The same measurements were made on these genotypes in the glasshouse, 2 weeks post emergence. Results In the field, total root length varied from 40 m to 112 m per plant. Final yield was correlated negatively with basal root specific root length and weakly but positively with total root weight. Solanum tuberosum group Phureja genotypes had more numerous roots and proportionally more basal than stolon roots compared with Solanum tuberosum, group Tuberosum genotypes. There were significant correlations between glasshouse and field measurements. Conclusions Our data demonstrate that variability in rooting traits amongst commercially available potato genotypes exists and a robust glasshouse screen has been developed. By measuring potato roots as described in this study, it is now possible to assess rooting traits of large populations of potato genotypes.

Isolation and characterization of an AINTEGUMENTA-like gene in different coconut (Cocos nucifera L.) varieties from Sri Lanka

Development of an efficient tissue culture protocol in coconut is hampered by numerous technical constraints. Thus a greater understanding of the fundamental aspects of embryogenesis is essential. The role of AINTEGUMENTA-like genes in embryogenesis has been elucidated not only in model plants but also in economically important crops. A coconut gene, CnANT, that encodes two APETALA2 (AP2) domains and a conserved linker region similar to those of the BABY BOOM transcription factor was cloned, characterized, and its tissue specific expression was examined. The full-length cDNA of 1,780 bp contains a 1,425-bp open reading frame that encodes a putative peptide of 474 amino acids. The genomic DNA sequence includes 2,317 bp and consists of nine exons interrupted by eight introns. The exon/intron organization of CnANT is similar to that of homologous genes in other plant species. Analysis of differential tissue expression by real-time polymerase chain reaction indicated that CnANT is expressed more highly in in vitro grown tissues than in other vegetative tissues. Sequence comparison of the genomic sequence of CnANT in different coconut varieties revealed one single nucleotide polymorphism and one indel in the first exon and first intron, respectively, which differentiate the Tall group of trees from Dwarfs. The indel sequence, which can be considered a simple sequence repeats marker, was successfully used to distinguish the Tall and Dwarf groups as well as to develop a marker system, which may be of value in the identification of parental varieties that are used in coconut breeding programs in Sri Lanka.