Continental shift? An analysis of convergence trends in European real estate equities

European economic and political integration have been recognised as having implications for patterns of performance in national real estate and capital markets and have generated a wide body of research and commentary. In 1999, progress towards monetary integration within the European Union culminated in the introduction of a common currency and monetary policy. This paper investigates the effects of this ‘event’ on the behaviour of stock returns in European real estate companies. A range of statistical tests is applied to the performance of European property companies to test for changes in segmentation, co-movement and causality. The results suggest that, relative to the wider equity markets, the dispersion of performance is higher, correlations are lower, a common contemporaneous factor has much lower explanatory power whilst lead-lag relationships are stronger. Consequently, the evidence of transmission of monetary integration to real estate securities is less noticeable than to general securities. Less and slower integration is attributed to the relatively small size of the real estate securities market and the local and national nature of the majority of the companies’ portfolios.

Integration and segmentation in European investment services markets: assessing the implications for international real estate investment

This paper analyses developments in the growth and configuration of the institutional savings markets within the European Union. The paper discusses the changing socio-economic context in which investment services within the EU are being delivered. The is followed by an examination of drivers of market integration such as the growth and consolidation of the fund management industry, the demographic and fiscal pressures for reform of pensions markets and the process and effects of the deregulation of investment services markets. There is a review of outstanding sources of market segmentation. The projections for future growth in pensions are outlined and implications for real estate investment assessed. It is concluded that, although numerous imponderables render reliable quantitative projections problematic, growth and restructuring of the institutional savings market is likely to increase cross-border capital flows to real estate markets.

Ownership Advantages in Cross-border Real Estate Development: Some Evidence from European Markets

Drawing upon European industry and country case studies, this paper investigates the scope and drivers of cross-border real estate development. It is argued that the real estate development process encompasses a diverse range of activities and actors. It is inherently localised, the production process is complex and emphermal, and the outputs are heterogeneous. It analyses a transactions database of European real estate markets to provide insights into the extent of, and variations in, market penetration by non-domestic real estate developers. The data were consistent with the expectation that non-domestic real estate developers from mature markets would have a high level of market penetration in immature markets. Compared to western European markets, the CEE real estate office sales by developers were dominated by US, Israeli and other EU developers. This pattern is consistent with the argument that non-domestic developers have substantial Dunning-type ownership advantages when entering immature real estate markets. However, the data also suggested some unexpected patterns. Relative to their GDP, Austria, Belgium, Denmark, Sweden, Netherlands and Israel accounted for large proportions of sales by developers. All are EU countries (except Israel) with small, open, affluent, highly traded economies. Further, the data also indicate that there may be a threshold where locational disadvantages outweigh ownership advantages and deter cross-border real estate development.

Analyzing the performance of non-listed real estate funds: an panel data analysis

The rapid growth of non-listed real estate funds over the last several years has contributed towards establishing this sector as a major investment vehicle for gaining exposure to commercial real estate. Academic research has not kept up with this development, however, as there are still only a few published studies on non-listed real estate funds. This paper aims to identify the factors driving the total return over a seven-year period. Influential factors tested in our analysis include the weighted underlying direct property returns in each country and sector as well as fund size, investment style gearing and the distribution yield. Furthermore, we analyze the interaction of non-listed real estate funds with the performance of the overall economy and that of competing asset classes and found that lagged GDP growth and stock market returns as well as contemporaneous government bond rates are significant and positive predictors of annual fund performance.

Sector, region or function? A MAD reassessment of real estate diversification in Great Britain

This paper re-examines whether it is more advantageous in terms of risk reduction to diversify by sector or region by comparing the performance of the ‘conventional’ regional classification of the UK with one based on modern socio-economic criteria using a much larger real estate data set than any previous study and the MAD portfolio approach. The general conclusion of this analysis is that property market sectors still dominate regions, however defined and so should be the first level of analysis when developing a portfolio diversification strategy. This is in line with previous research. When the performance of Functional groups is compared with the ‘conventional’ administrative regions the results here show that, when functionally based, groupings can in some cases provide greater risk reduction. In addition the underlying characteristics of these functional groups may be much more insightful and acceptable to real estate portfolio managers in considering the assets that a portfolio might contain.

Data uncertainty in real estate forecasting

The rapid expansion of the TMT sector in the late 1990s and more recent growing regulatory and corporate focus on business continuity and security have raised the profile of data centres. Data centres offer a unique blend of occupational, physical and technological characteristics compared to conventional real estate assets. Limited trading and heterogeneity of data centres also causes higher levels of appraisal uncertainty. In practice, the application of conventional discounted cash flow approaches requires information about a wide range of inputs that is difficult to derive from limited market signals or estimate analytically. This paper outlines an approach that uses pricing signals from similar traded cash flows is proposed. Based upon ‘the law of one price’, the method draws upon the premise that two identical future cash flows must have the same value now. Given the difficulties of estimating exit values, an alternative is that the expected cash flows of data centre are analysed over the life cycle of the building, with corporate bond yields 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. Although there are rarely assets that have identical cash flows and some approximation is necessary, the level of appraiser subjectivity is dramatically reduced.

A meta analysis of real estate fund performance

This paper provides evidence regarding the risk-adjusted performance of 19 UK real estate funds in the UK, over the period 1991-2001. Using Jensen’s alpha the results are generally favourable towards the hypothesis that real estate fund managers showed superior risk-adjusted performance over this period. However, using three widely known parametric statistical procedures to jointly test for timing and selection ability the results are less conclusive. The paper then utilises the meta-analysis technique to further examine the regression results in an attempt to estimate the proportion of variation in results attributable to sampling error. The meta-analysis results reveal strong evidence, across all models, that the variation in findings is real and may not be attributed to sampling error. Thus, the meta-analysis results provide strong evidence that on average the sample of real estate funds analysed in this study delivered significant risk-adjusted performance over this period. The meta-analysis for the three timing and selection models strongly indicating that this out performance of the benchmark resulted from superior selection ability, while the evidence for the ability of real estate fund managers to time the market is at best weak. Thus, we can say that although real estate fund managers are unable to outperform a passive buy and hold strategy through timing, they are able to improve their risk-adjusted performance through selection ability.

The cost of choice: how corporate real estate managers evaluate business space options

Firms are faced with a wider set of choices when they identify a need for new office space. They can build or purchase accommodation, lease space for long or short periods with or without the inclusion of services, or they can use “instant office” solutions provided by serviced office operators. But how do they evaluate these alternatives and are they able to make rational choices? The research found that the shortening of business horizons lead to the desire for more office space on short-term contracts often with the inclusion of at least some facilities management and business support services. The need for greater flexibility, particularly in financial terms, was highlighted as an important criteria when selecting new office accommodation. The current office portfolios held were perceived not to meet these requirements. However, there was often a lack of good quality data available within occupiers which could be used to help them analyse the range of choices in the market. Additionally, there were other organisational constraints to making decisions about inclusive real estate products. These included fragmentation of decisions-making, internal politics and the lack of assessment of business risk alongside real estate risk. Overall therefore, corporate occupiers themselves act as an interial force to the development of new and innovative real estate products.

Commercial real estate return distributions: a review of literature and empirical evidence

This paper review the literature on the distribution of commercial real estate returns. There is growing evidence that the assumption of normality in returns is not safe. Distributions are found to be peaked, fat-tailed and, tentatively, skewed. There is some evidence of compound distributions and non-linearity. Public traded real estate assets (such as property company or REIT shares) behave in a fashion more similar to other common stocks. However, as in equity markets, it would be unwise to assume normality uncritically. Empirical evidence for UK real estate markets is obtained by applying distribution fitting routines to IPD Monthly Index data for the aggregate index and selected sub-sectors. It is clear that normality is rejected in most cases. It is often argued that observed differences in real estate returns are a measurement issue resulting from appraiser behaviour. However, unsmoothing the series does not assist in modelling returns. A large proportion of returns are close to zero. This would be characteristic of a thinly-traded market where new information arrives infrequently. Analysis of quarterly data suggests that, over longer trading periods, return distributions may conform more closely to those found in other asset markets. These results have implications for the formulation and implementation of a multi-asset portfolio allocation strategy.

Change & flexibility: the role of serviced office space in corporate real estate portfolios and office markets

With the increasing pace of change, organisations have sought new real estate solutions which provide greater flexibility. What appears to be required is not flexibility for all uses but appropriate flexibility for the volatile, risky and temporal part of a business. This is the essence of the idea behind the split between the core and periphery portfolio. The serviced office has emerged to fill the need for absolute flexibility. This market is very diverse in terms of the product, services and target market. It has grown and gained credibility with occupiers and more recently with the property investment market. Occupiers similarly use this space in a variety of ways. Some solely occupy serviced space while others use it to complement their more permanent space. It therefore appears that the market is fulfilling the role of providing periphery space for at least some of the occupiers. In all instances the key to this space is a focus on financial and tenurial flexibility which is not provided by other types of business space offered.

The gender gap in real estate sales: negotiation skill or agent selection?

This study examines differences in net selling price for residential real estate across male and female agents. A sample of 2,020 home sales transactions from Fulton County, Georgia are analyzed in a two-stage least squares, geospatial autoregressive corrected, semi-log hedonic model to test for gender and gender selection effects. Although agent gender seems to play a role in naïve models, its role becomes inconclusive as variables controlling for possible price and time on market expectations of the buyers and sellers are introduced to the models. Clear differences in real estate sales prices, time on market, and agent incomes across genders are unlikely due to differences in negotiation performance between genders or the mix of genders in a two-agent negotiation. The evidence suggests an interesting alternative to agent performance: that buyers and sellers with different reservation price and time on market expectations, such as those selling foreclosure homes, tend to select agents along gender lines.

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.

Lessons from real estate partnerships in the UK: Drivers, barriers and critical success factors

Purpose – This paper seeks to summarise the main research findings from a detailed, qualitative set of structured interviews and case studies of Real Estate Partnership (REP) schemes in the UK, which involve the construction of built facilities. The research, which was funded by the Foundation for the Built Environment, examines the evolution of REPs in the UK and in Europe. The paper also aims to analyse best practice, critical factors for success, and lessons for the future. Design/methodology/approach – The research in this paper is based around ten semi-structured interviews conducted with senior representatives from corporate occupiers, property consultants, legal practices and REP service providers. Findings – The research in the paper demonstrates that REPs are particularly suited to the UK, where lease lengths are relatively long, and the level of corporate real estate owner-occupation is often higher than elsewhere. It also shows that further research is needed to examine the future shape and form of the UK REP market. Research limitations/implications – The paper is based on a limited number of in-depth case study interviews. The paper shows that further research is needed to find better ways to examine REPs empirically. Practical implications – The paper is important in highlighting a number of main issues in developing REPs: identifying with occupier's objectives; risk transfer and size of contract; and developing appropriate innovation and skills. Originality/value – The paper examines the drivers, barriers and critical success factors (at strategic and operational levels) for REPs in the UK in detail and will be of value to property managers, facilities managers, investors, financiers, and others involved in the REP process.

Occupational futures? Divesting real estate and corporate PFI

Property ownership can tie up large amounts of capital and management energy that business could employ more productively elsewhere. Competitive pressures, accounting changes and increasingly sophisticated occupier requirements are building demand for new and innovative ways to satisfy corporate occupation needs. The investment climate is also changing. Falling interest rates and falling inflation can be expected to undermine returns from the traditional FRI lease. In future, investment returns will be more dependent on active and innovative management geared to the needs of occupiers on whom income depends. Occupier and investor interests, therefore, look set to coincide, but unlocking the potential for both parties will depend on developing new finance and investment vehicles that align their respective needs. In the UK, examples include PFI in the public sector and off-balance sheet financing in the private sector. In the USA, “synthetic lease” structures have also become popular. Growing investment market experience in assessing risks and returns suggests scope for further innovative arrangements in the corporate sector. But how can such arrangements be structured? What are the risks, drivers and barriers?

A critical review of methodologies for measuring rental depreciation applied to UK commercial real estate

Real estate depreciation continues to be a critical issue for investors and the appraisal profession in the UK in the 1990s. Depreciation-sensitive cash flow models have been developed, but there is a real need to develop further empirical methodologies to determine rental depreciation rates for input into these models. Although building quality has been found to be an important explanatory variable in depreciation it is very difficult to incorporate it into such models or to analyse it retrospectively. It is essential to examine previous depreciation research from real estate and economics in the USA and UK to understand the issues in constructing a valid and pragmatic way of calculating rental depreciation. Distinguishing between 'depreciation' and 'obsolescence' is important, and the pattern of depreciation in any study can be influenced by such factors as the type (longitudinal or crosssectional) and timing of the study, and the market state. Longitudinal studies can analyse change more directly than cross-sectional studies. Any methodology for calculating rental depreciation rate should be formulated in the context of such issues as 'censored sample bias', 'lemons' and 'filtering', which have been highlighted in key US literature from the field of economic depreciation. Property depreciation studies in the UK have tended to overlook this literature, however. Although data limitations and constraints reduce the ability of empirical property depreciation work in the UK to consider these issues fully, 'averaging' techniques and ordinary least squares (OLS) regression can both provide a consistent way of calculating rental depreciation rates within a 'cohort' framework.