An evaluation of the performance of UK real estate forecasters

Given the significance of forecasting in real estate investment decisions, this paper investigates forecast uncertainty and disagreement in real estate market forecasts. It compares the performance of real estate forecasters with non-real estate forecasters. Using the Investment Property Forum (IPF) quarterly survey amongst UK independent real estate forecasters and a similar survey of macro-economic and capital market forecasters, these forecasts are compared with actual performance to assess a number of forecasting issues in the UK over 1999-2004, including forecast error, bias and consensus. The results suggest that both groups are biased, less volatile compared to market returns and inefficient in that forecast errors tend to persist. The strongest finding is that forecasters display the characteristics associated with a consensus indicating herding.

Real estate in the mixed-asset portfolio: the question of consistency

The recent poor performance of the equity market in the UK has meant that real estate is increasingly been seen as an attractive addition to the mixed-asset portfolio. However, determining whether the good return enjoyed by real estate is a temporary or long-term phenomenon is a question that remains largely unanswered. In other words, there is little or no evidence to indicate whether real estate should play a consistent role in the mixed-asset portfolio over short- and long-term investment horizons. Consistency in this context refers to the ability of an asset to maintain a positive allocation in an efficient portfolio over different holding periods. Such consistency is a desirable trait for any investment, but takes on particular significance when real estate is considered, as the asset class is generally perceived to be a long-term investment due to illiquidity. From an institutional investor’s perspective, it is therefore crucial to determine whether real estate can be reasonably expected to maintain a consistent allocation in the mixed-asset portfolio in both the short and long run and at what percentage. To address the question of consistency the allocation of real estate in the mixed-asset portfolio was calculated over different holding periods varying from 5- to 25-years.

The role of the log transformation in forecasting economic variables

For forecasting and economic analysis many variables are used in logarithms (logs). In time series analysis, this transformation is often considered to stabilize the variance of a series. We investigate under which conditions taking logs is beneficial for forecasting. Forecasts based on the original series are compared to forecasts based on logs. For a range of economic variables, substantial forecasting improvements from taking logs are found if the log transformation actually stabilizes the variance of the underlying series. Using logs can be damaging for the forecast precision if a stable variance is not achieved.

Understanding the barriers to real estate investment in developing economies

Baum (2008a) related the number of real estate funds investing in developing economies to simple economic and demographic variables, and showed that, while the popularity of markets was explained by population and GDP per capita, some countries receive more or less investment than the model predicted. Why is this? In this paper we undertake a literature review to identify the barriers which inhibit international real estate investment. We test our initial findings by questioning property investment professionals through semi-structured interviews. By doing this we were able to verify our list of barriers, identify those barriers which are most likely to affect real estate investors, and to indicate whether there are any real estate-specific variables that create barriers which have not received any academic attention. We show that distortions in international capital flows may be explained by a combination of these formal and informal barriers.

Real options and game theoretical approaches to real estate development projects: multiple equilibria and the implications of different tie-breaking rules

This paper contributes to a fast growing literature which introduces game theory in the analysis of real option investments in a competitive setting. Specifically, in this paper we focus on the issue of multiple equilibria and on the implications that different equilibrium selections may have for the pricing of real options and for subsequent strategic decisions. We present some theoretical results of the necessary conditions to have multiple equilibria and we show under which conditions different tie-breaking rules result in different economic decisions. We then present a numerical exercise using the in formation set obtained on a real estate development in South London. We find that risk aversion reduces option value and this reduction decreases marginally as negative externalities decrease.

A note on the use of spreadsheet optimisers in real estate analysis

Modern Portfolio Theory (MPT) has been advocated as a more rational approach to the construction of real estate portfolios. The application of MPT can now be achieved with relative ease using the powerful facilities of modern spreadsheet, and does not necessarily need specialist software. This capability is to be found in the use of an add-in Tool now found in several spreadsheets, called an Optimiser or Solver. The value in using this kind of more sophisticated analysis feature of spreadsheets is increasingly difficult to ignore. This paper examines the use of the spreadsheet Optimiser in handling asset allocation problems. Using the Markowitz Mean-Variance approach, the paper introduces the necessary calculations, and shows, by means of an elementary example implemented in Microsoft's Excel, how the Optimiser may be used. Emphasis is placed on understanding the inputs and outputs from the portfolio optimisation process, and the danger of treating the Optimiser as a Black Box is discussed.

Predicting the annual performance of UK real estate: timeliness versus coverage

The IPD Annual Index is the largest and most comprehensive Real Estate market index available in the UK Such coverage however inevitably leads to delays in publication. In contrast there are a number of quarterly and monthly indices which are published within days of the year end but which lack the coverage in terms of size and numbers of properties. This paper analyses these smaller but more timely indices to see whether such indices can be used to predict the performance of the IPD Annual Index. Using a number of measures of forecasting accuracy it is shown that the smaller indices provide unbiased and efficient predictions of the IPD Annual Index. Such indices also significantly outperform a naive no-change model. Although no one index performs significantly better than the others. The more timely indices however do not perfectly track the IPD Annual Index. As a result any short run predictions of performance will be subject to a degree of error. Nevertheless the more timely indices, although lacking authoritative coverage, provide a valuable service to investors giving good estimates of Real Estates performance well before the publication of the IPD Annual Index.

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.

Smoothness of scale functions for spectrally negative Lévy processes

Scale functions play a central role in the fluctuation theory of spectrally negative Lévy processes and often appear in the context of martingale relations. These relations are often require excursion theory rather than Itô calculus. The reason for the latter is that standard Itô calculus is only applicable to functions with a sufficient degree of smoothness and knowledge of the precise degree of smoothness of scale functions is seemingly incomplete. The aim of this article is to offer new results concerning properties of scale functions in relation to the smoothness of the underlying Lévy measure. We place particular emphasis on spectrally negative Lévy processes with a Gaussian component and processes of bounded variation. An additional motivation is the very intimate relation of scale functions to renewal functions of subordinators. The results obtained for scale functions have direct implications offering new results concerning the smoothness of such renewal functions for which there seems to be very little existing literature on this topic.

The impact of information and communications technology on commercial real estate in the new economy

Purpose – This paper seeks to critically review the conceptual frameworks that have been developed for assessing the impact of information and communications technology (ICT) on real estate. Design/methodology/approach – The research is based on a critical review of existing literature and draws from examples of previous empirical research in the field. Findings – The paper suggests that a “socio-technical framework” is more appropriate to examine ICT impact in real estate than other “deterministic” frameworks. Therefore, ICT is an important part of the new economy, but must be seen in the context of a number of other social and economic factors. Research limitations/implications – The research is based on a qualitative assessment of existing frameworks, and by using examples from commercial real estate, assesses the extent to which a “socio-technical” framework can aid understanding of ICT impact. Practical implications – The paper is important in highlighting a number of the main issues in conceptualising ICT impact in real estate and also critically examines the emergence of a new economy in the information society within the general context of real estate. The paper also highlights research gaps in the field. Originality/value – The paper deconstructs the myths of the “death of real estate” and “productivity increase means jobs loss”, in relation to office real estate. Finally, it examines some of the ways in which ICT is impacting on real estate and suggests the most important components for a future research agenda in the field of ICT and real estate impact, and will be of value to property investors, facilities managers, developers, financiers, and others.

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.

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.

Sequential variations of phytoplankton growth and mortality in an NPZ model: a remote-sensing-based assessment

Radiometric data in the visible domain acquired by satellite remote sensing have proven to be powerful for monitoring the states of the ocean, both physical and biological. With the help of these data it is possible to understand certain variations in biological responses of marine phytoplankton on ecological time scales. Here, we implement a sequential data-assimilation technique to estimate from a conventional nutrient–phytoplankton–zooplankton (NPZ) model the time variations of observed and unobserved variables. In addition, we estimate the time evolution of two biological parameters, namely, the specific growth rate and specific mortality of phytoplankton. Our study demonstrates that: (i) the series of time-varying estimates of specific growth rate obtained by sequential data assimilation improves the fitting of the NPZ model to the satellite-derived time series: the model trajectories are closer to the observations than those obtained by implementing static values of the parameter; (ii) the estimates of unobserved variables, i.e., nutrient and zooplankton, obtained from an NPZ model by implementation of a pre-defined parameter evolution can be different from those obtained on applying the sequences of parameters estimated by assimilation; and (iii) the maximum estimated specific growth rate of phytoplankton in the study area is more sensitive to the sea-surface temperature than would be predicted by temperature-dependent functions reported previously. The overall results of the study are potentially useful for enhancing our understanding of the biological response of phytoplankton in a changing environment.

Evaluating relative impact of virtual reality system variables on architectural design comprehension and presence - A variable-centered approach using fractional factorial experiment

The relative contributions of five variables (Stereoscopy, screen size, field of view, level of realism and level of detail) of virtual reality systems on spatial comprehension and presence are evaluated here. Using a variable-centered approach instead of an object-centric view as its theoretical basis, the contributions of these five variables and their two-way interactions are estimated through a 25-1 fractional factorial experiment (screening design) of resolution V with 84 subjects. The experiment design, procedure, measures used, creation of scales and indices, results of statistical analysis, their meaning and agenda for future research are elaborated.