The case for property in the long run: a cointegration test

The benefits of property in the mixed asset portfolio has been the subject of a number of studies both in the UK and around the world. The traditional way of investigating this issue is to use MPT with the results suggesting that Property should play a significant role in the mixed asset portfolio. These results are not without criticism and generally revolve around quality and quantity of the property data series. To overcome these deficiencies this paper uses cointegration methodology which examines the longer term time series behaviour of various asset markets using a very long run desmoothed data series. Using a number of different cointegration tests, both pair-wise and multivariate, the results show, in unambiguous terms, that there is no contemporous cointegration between the major asset classes Property, Equities and Bonds. The implications of which are that Property does indeed have a risk reducing place to play in the long-run strategic mixed-asset portfolio. A result of particular relevance to institutions such as pension funds and life insurance companies who would wish to hold investments for the long-term.

Agricultural tenancies: implied surrender and regrant and the operation of the Agricultural Tenancies Act 1995

Agricultural tenancies arising after 1st September 1995 are mostly governed by the Agricultural Tenancies Act 1995. As such, tenants under this Act do not benefit from the degree of protection conferred on tenancies already in existence, which remain under the Agricultural Holdings Act 1986. Section 4 of the 1995 Act seeks to protect those tenancies which subsequently inadvertently undergo a surrender and regrant and which would otherwise lose the protection of the 1986 Act. This paper seeks to investigate, by relating recent case law and statute to the situation of agricultural tenancies, the occasions where surrender and regrant might occur and whether in such instances the protection of the 1986 Act will be lost.

The Finance Act 1998: can the owners of agricultural land continue to gain from their capital disposals?

This paper seeks to analyse and discuss, from the perspective of the owners of agricultural land, the main changes to the Capital Gains Tax regime introduced in the Budget of March 1998 and contained in the Finance Act 1998. The immediate replacement of indexation with a new Taper relief is examined, along with the phasing out of Retirement relief, and the interaction of Taper relief with Rollover relief.

The conditional performance of UK property funds

The evaluation of investment fund performance has been one of the main developments of modern portfolio theory. Most studies employ the technique developed by Jensen (1968) that compares a particular fund's returns to a benchmark portfolio of equal risk. However, the standard measures of fund manager performance are known to suffer from a number of problems in practice. In particular previous studies implicitly assume that the risk level of the portfolio is stationary through the evaluation period. That is unconditional measures of performance do not account for the fact that risk and expected returns may vary with the state of the economy. Therefore many of the problems encountered in previous performance studies reflect the inability of traditional measures to handle the dynamic behaviour of returns. As a consequence Ferson and Schadt (1996) suggest an approach to performance evaluation called conditional performance evaluation which is designed to address this problem. This paper utilises such a conditional measure of performance on a sample of 27 UK property funds, over the period 1987-1998. The results of which suggest that once the time varying nature of the funds beta is corrected for, by the addition of the market indicators, the average fund performance show an improvement over that of the traditional methods of analysis.

The initial return performance of UK property company IPOs

This paper presents empirical evidence for a sample of 48 UK property company initial public offerings over the period 1986 to 1995. From which a number of conclusions can be drawn. First, property companies in general show positive average first day returns. Second, the average first day return by property trading companies is significantly higher than that for property investment companies

Asset allocation, cross-class correlation and the structure of property returns

Practical applications of portfolio optimisation tend to proceed on a “top down” basis where funds are allocated first at asset class level (between, say, bonds, cash, equities and real estate) and then, progressively, at sub-class level (within property to sectors, office, retail, industrial for example). While there are organisational benefits from such an approach, it can potentially lead to sub-optimal allocations when compared to a “global” or “side-by-side” optimisation. This will occur where there are correlations between sub-classes across the asset divide that are masked in aggregation – between, for instance, City offices and the performance of financial services stocks. This paper explores such sub-class linkages using UK monthly stock and property data. Exploratory analysis using clustering procedures and factor analysis suggests that property performance and equity performance are distinctive: there is little persuasive evidence of contemporaneous or lagged sub-class linkages. Formal tests of the equivalence of optimised portfolios using top-down and global approaches failed to demonstrate significant differences, whether or not allocations were constrained. While the results may be a function of measurement of market returns, it is those returns that are used to assess fund performance. Accordingly, the treatment of real estate as a distinct asset class with diversification potential seems justified.

The timing and selection ability of UK property funds: an empirical investigation

This paper examines the selectivity and market timing performance of a sample of 21 UK property funds over the period Q3 1977 through to Q2 1987. The main finding of which that there is evidence of some superior selectivity performance on the part of UK property funds but that there are few funds who are able to successfully time the market.

Is there a place for property in the multi-asset portfolio?

The case for property has typically rested on the application of modern portfolio theory (MPT), in that property has been shown to offer increased diversification benefits within a multi asset portfolio without hurting portfolio returns especially for lower risk portfolios. However this view is based upon the use of historic, usually appraisal based, data for property. Recent research suggests strongly that such data significantly underestimates the risk characteristics of property, because appraisals explicitly or implicitly smooth out much of the real volatility in property returns. This paper examines the portfolio diversification effects of including property in a multi-asset portfolio, using UK appraisal based (smoothed) data and several derived de-smoothed series. Having considered the effects of de-smoothing, we then consider the inclusion of a further low risk asset (cash) in order to investigate further whether property's place in a low risk portfolio is maintained. The conclusions of this study are that the previous supposed benefits of including property have been overstated. Although property may still have a place in a 'balanced' institutional portfolio, the case for property needs to be reassessed and not be based simplistically on the application of MPT.

Commentary on an example of a tenancy agreement for an agricultural holding

This paper sets out an example of a standard agricultural tenancy, being one creating a tenancy from year to year and consequently covered by the agricultural holdings legislation. A facing-page commentary gives a clause-by-clause analysis of the agreement, the implications of each provision being discussed in the light of the law of contract, agricultural holdings legislation and, where appropriate, subsequent caselaw.

Producing leisure spaces out of thin air: the case of the Countryside Stewardship Scheme

This paper examines the growing dysfunction between the apparently increasing significance of diverse leisure practices in the countryside and the largely unchanging official response towards them. Although there is recognition in the recent rural White Paper (DOE and MAFF, 1995) that access is essential to enjoying the countryside, the construction of this term is dubious, since paid access agreements, based on producer requirements, are favoured over any form of demand-driven freedom to roam. Using the Countryside Stewardship Scheme (CSS) as an example of the incentive structure developed to promote this policy, the paper applies Plato's simulacrum as a reading of how this process is being utilised to underpin the dominant rights associated with rural property interests. In particular, the paper makes the point that rather than representing the corollary of a market situation, as its supporters claim, the CSS involves government grant for the eclectic provision of short term licences over ground which remains unmapped as anything other than its continued agricultural use. In concluding, the paper asserts that rather than representing an increase in the availability of leisure sites in the countryside, the CSS and other schemes represent a diversion from the wider and deeper socio-cultural process of continued wealth and power redistribution.

Marriage value and scarcity in agricultural rents: a discussion of the findings in Childers v Ankers

Formal statutory guidance to arbitrators involved in settling disputes over rents for agricultural holdings is contained in the Agricultural Holdings Act 1986. The particular features of the agricultural letting market raise valuation problems which the Act itself has failed to satisfactorily address, most notably the degree to which marriage value and scarcity should be taken into account. The 1995 Court of Appeal case of Childers v Anker addresses several of the key issues. This paper seeks to explore the findings and practical implications of the case for rental valuers and arbitrators. It argues that sitting tenants may be seriously disadvantaged by the court's judgements, not least by having to pay rents on review which reflect elements of marriage value and possibly scarcity value.

The future returns for property required by UK pension funds

In the 1970s Real Estate represented over 17% of the average pension funds total assets. Today such funds hold less than 4%, a figure not seen since the 1960s. This reduction in Real Estate holdings is mainly attributable to the relatively poor performance of Real Estate against other asset classes since the 1980s. Whether pension funds will increase their holding at any point in the future depends therefore on the expected return of Real Estate by comparison with that required to justify a particular asset holding. Using the technique of Modern Portfolio Theory (MPT), this paper assesses the required return that Real Estate would have to offer to justify a 15% holding in a mixed asset portfolio. This figure and the risk/return characteristics of the major asset classes is taken from survey data. Under a number of scenarios it is found that Real Estate can play a part in a mixed asset portfolio at the 15% level. In some cases however, the expected returns of Real Estate are not sufficient to justify a weight of 15% in this asset.

The future returns for property required by UK pension funds: the BHS data

Previous studies of the place of Property in the multi-asset portfolio have generally relied on historical data, and have been concerned with the supposed risk reduction effects that Property would have on such portfolios. In this paper a different approach has been taken. Not only are expectations data used, but we have also concentrated upon the required return that Property would have to offer to achieve a holding of 15% in typical UK pension fund portfolios. Using two benchmark portfolios for pension funds, we have shown that Property's required return is less than that expected, and therefore it could justify a 15% holding.

Recreational access to private land in England and Wales: public good; private interest

Since the Eighteenth Century the protection of public recreational access to private land has been maintained by the state through a mixture of legal rights of passage and the safeguarding of certain de facto access rights. While this situation has been modified in the last fifty years to facilitate some formalisation of access arrangements and landowner compensation in areas of high recreational pressure and low legal accessibility, recent policies indicate that a shift from public to private rights is underway. At the core of this paradigm shift are the new access payment schemes introduced as part of the restructuring of the European Common Agricultural Policy. Under these schemes landowners are now paid for 'supplying' recreational access, with the state, as the former upholder of citizen rights, now assuming the duplicitous position of further underwriting private property ownership through the effective commodification of access, while simultaneously proclaiming significant improvements in citizens' access rights.

Property company performance and real interest rates: a regime-switching approach

Linear models of property market performance may be misspecified if there exist distinct states where the market drivers behave in different ways. This paper examines the applicability of non-linear regime-based models. A Self Exciting Threshold Autoregressive (SETAR) model is applied to property company share data, using the real rate of interest to define regimes. Distinct regimes appear exhibiting markedly different market behaviour. The model both casts doubt on the specification of conventional linear models and offers the possibility of developing effective trading rules for real estate equities.