UK planning controls and the market responsiveness of housing supply

There is growing international interest in the impact of regulatory controls on the supply of housing The UK has a particularly restrictive planning regime and a detailed and uncertain process of development control linked to it. This paper presents the findings of empirical research on the time taken to gain planning permission for selected recent major housing projects from a sample of local authorities in southern England. The scale of delay found was far greater than is indicated by average official data measuring the extent to which local authorities meet planning delay targets. Hedonic analysis indicated that there is considerable variation in time it takes local authorities to process planning applications, with the worst being four times slower than the best. Smaller builders and housing association developments are processed more quickly than those of large developers and small sites appear to be particularly time intensive. These results suggest that delays in development control may be a significant contributory factor to the low responsiveness of UK housing supply to upturns in market activity.

The dynamics of asset prices and transaction activity in illiquid markets: the case of private commercial real estate

This paper investigates the relationship between capital flows, turnover and returns for the UK private real estate market. We examine a number of possible implication of capital flows and turnover on capital returns testing for evidence of a price pressure effect, ‘return chasing’ behaviour and information revelation. The main tool of analysis is a panel vector autoregressive (VAR) regression model in which institutional capital flows, turnover and returns are specified as endogenous variables in a two equation system in which we also control for macro-economic variables. Data on flows, turnover and returns are obtained for the 10 market segments covering the main UK commercial real estate sectors. Our results do not support the widely-held belief among practitioners that capital flows have a ‘price pressure’ effect. Although there is some evidence of return chasing behaviour, the short timescales involved suggest this finding may be due to delayed recording of flows relative to returns given the difficulties of market entry. We find a significant positive relationship between lagged turnover and contemporaneous capital returns, suggesting that asset turnover provides pricing information.

Green noise or green value? Measuring the price effects of environmental certification in commercial buildings

This paper investigates the price effects of environmental certification on commercial real estate assets. It is argued that there are likely to be three main drivers of price differences between certified and non-certified buildings. First, certified buildings offer a bundle of benefits to occupiers relating to business productivity, image and occupancy costs. Second, due to these occupier benefits, certified buildings can result in higher rents and lower holding costs for investors. Third, certified buildings may require a lower risk premium. Drawing upon the CoStar database of US commercial real estate assets, hedonic regression analysis is used to measure the effect of certification on both rent and price. We first estimate the rental regression for a sample of 110 LEED and 433 Energy Star as well as several thousand benchmark buildings to compare the sample to. The results suggest that, compared to buildings in the same metropolitan region, certified buildings have a rental premium and that the more highly rated that buildings are in terms of their environmental impact, the greater the rental premium. Furthermore, based on a sample of transaction prices for 292 Energy Star and 30 LEED-certified buildings, we find price premia of 10% and 31% respectively compared to non-certified buildings in the same metropolitan area

Spatial patterns of office employment in the New York region

This study analyzes the regional spatial dynamics of the New York region for a period of roughly twenty years and places the effects of the 9/11 terrorist attacks in the context of longer-term regional dynamics. The analysis reveals that office-using industries are still heavily concentrated in Manhattan despite ongoing decentralization in many of these industries over the last twenty years. Financial services tend to be highly concentrated in Manhattan whereas administrative and support services are the least concentrated of the six major office-using industry groups. Although office employment has been by and large stagnant in Manhattan for at least two decades, growth of output per worker has outpaced the CMSA as well as the national average. This productivity differential is mainly attributable to competitive advantages of office-using industries in Manhattan and not to differences in industry composition. Finally, the zip-code level analysis of the Manhattan core area yielded further evidence of the existence of significant spillover effects at the small-scale level.

Sources of alpha and beta in property funds

This paper examines issues related to potential analytical performance systems for global property funds. These will include traditional attribution methods but will also cover the performance concepts of alpha and beta widely used in other asset classes. We look at issues including...what creates beta, and what drives alpha in real estate investment? How can it be measured and isolated? How do these concepts relate to traditional attribution systems? Can performance records and performance fees adequately distinguish between these drivers? In this paper we illustrate these issues by reference to a case study addressing the complete performance record of a single unlisted fund.

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.

Housing supply and planning delay in the South of England

There is growing international interest in the impact of regulatory controls on the supply of housing The UK has a particularly restrictive planning regime and a detailed and uncertain process of development control linked to it. This paper presents the findings of empirical research on the time taken to gain planning permission for selected recent major housing projects from a sample of local authorities in southern England. The scale of delay found was far greater than is indicated by average official data measuring the extent to which local authorities meet planning delay targets. If these results are representative of the country as a whole, they indicate that planning delay could be a major cause of the slow responsiveness of British housing supply.

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.

Firm size and competition: a comparison of the housebuilding industries in Australia, the UK and the USA

Housebuilding is frequently viewed as an industry full of small firms. However, large firms exist in many countries. Here, a comparative analysis is made of the housebuilding industries in Australia, Britain and the USA. Housebuilding output is found to be much higher in Australia and the USA than in Britain when measured on a per capita basis. At the same time, the degree of market concentration in Australia and the USA is relatively low but in Britain it is far greater, with a few firms having quite substantial market shares. Investigation of the size distribution of the top 100 or so firms ranked by output also shows that the decline in firm size from the largest downwards is more rapid in Britain than elsewhere. The exceptionalism of the British case is put down to two principal reasons. First, the close proximity of Britain’s regions enables housebuilders to diversify successfully across different markets. The gains from such diversification are best achieved by large firms, because they can gain scale benefits in any particular market segment. Second, land shortages induced by a restrictive planning system encourage firms to takeover each other as a quick and beneficial means of acquiring land. The institutional rules of planning also make it difficult for new entrants to come in at the bottom end of the size hierarchy. In this way, concentration grows and a handful of large producers emerge. These conditions do not hold in the other two countries, so their industries are less concentrated. Given the degree of rivalry between firms over land purchases and takeovers, it is difficult to envisage them behaving in a long-term collusive manner, so that competition in British housebuilding is probably not unduly compromised by the exceptional degree of firm concentration. Reforms to lower the restrictions, improve the slow responsiveness and reduce the uncertainties associated with British planning systems’ role in housing supply are likely to greatly improve the ability of new firms to enter housebuilding and all firms’ abilities to increase output in response to rising housing demand. Such reforms would also probably lower overall housebuilding firm concentration over time.

The price of space: the convergence of value in use and value in exchange

This paper discusses concepts of value from the point of view of the user of the space and the counter view of the provider of the same. Land and property are factors of production. The value of the land flows from the use to which it is put, and that in turn, is dependent upon the demand (and supply) for the product or service that is produced/provided from that space. If there is a high demand for the product (at a fixed level of supply), the price will increase and the economic rent for the land/property will increase accordingly. This is the underlying paradigm of Ricardian rent theory where the supply of land is fixed and a single good is produced. In such a case the rent of land is wholly an economic rent. Economic theory generally distinguishes between two kinds of price, price of production or “value in use” (as determined by the labour theory of value), and market price or “value in exchange” (as determined by supply and demand). It is based on a coherent and consistent theory of value and price. Effectively the distinction is between what space is ‘worth’ to an individual and that space’s price of exchange in the market place. In a perfect market where any individual has access to the same information as all others in the market, price and worth should coincide. However in a market where access to information is not uniform, and where different uses compete for the same space, it is more likely that the two figures will diverge. This paper argues that the traditional reliance of valuers to use methods of comparison to determine “price” has led to an artificial divergence of “value in use” and “value in exchange”, but now such comparison are becoming more difficult due to the diversity of lettings in the market place, there will be a requirement to return to fundamentals and pay heed to the thought process of the user in assessing the worth of the space to be let.

A question of value: a discussion of property pricing and definitions of value

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 practice has documented different bases of value or definitions of value both internationally and nationally. This paper discusses these definitions and suggests that there is a common thread that ties the definitions together.

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 location of executive suites and business centers in the United States: an exploratory analysis

Increasingly, corporate occupiers seek more flexible ways of meeting their accommodation needs. One consequence of this process has been the growth of the executive suite, serviced office or business centre market. This paper, the final report of a research project funded by the Real Estate Research Institute, focuses upon the geographical distribution of business centers offering executive suites within the US. After a brief review of the development of the market, the paper examines the availability of data, provides basic descriptive statistics of the distribution of executive suites by state and by metropolitan statistical area and then attempts to model the distribution using demographic and socio-economic data at MSA level. The distribution reflects employment in key growth sectors and the position of the MSA in the urban hierarchy. An appendix presents a preliminary view of the global distribution of suites.

The risks of investing in the real estate markets of the asian region

The Asian region has become a focus of attention for investors in recent years. Due to the strong economic performance of the region, the higher expected returns in the area compared with Europe and the USA and the additional diversification benefits investment in the region would offer. Nonetheless many investors have doubts about the prudence of investing in such areas. In particular it may be felt that the expected returns offered in the countries of the Asian region are not sufficient to compensate investors for the increased risks of investing in such markets. These risks can be categorised into under four headings: investment risk, currency risk, political risk, and institutional risk. This paper analyses each of these risks in turn to see if they are sufficiently large to deter real estate investment in the region in general or in a particular country.

Persistence of UK Real Estate returns: a Markov chain analysis

The persistence of investment performance is a topic of perennial interest to investors. Efficient Markets theory tells us that past performance can not be used to predict future performance yet investors appear to be influenced by the historical performance in making their investment allocation decisions. The problem has been of particular interest to investors in real estate; not least because reported returns from investment in real estate are serially correlated thus implying some persistence in investment performance. This paper applies the established approach of Markov Chain analysis to investigate the relationship between past and present performance of UK real estate over the period 1981 to 1996. The data are analysed by sector, region and size. Furthermore some variations in investment performance classification are reported and the results are shown to be robust.