The tenant as a customer: can good service improve real estate performance?

Customer Relationship Management (CRM) theory suggests that good customer service results in satisfied customers, who in turn are more likely to remain loyal and recommend the service provider to others. Proponents of good customer service for tenants claim that landlords should see a return on any investment in their customer service, in the form of enhanced real estate performance. This paper begins by reviewing research on customer service returns in other industries. Through consideration of the characteristics of real estate markets, the paper explains how factors such as (inter alia) lease terms, property market cycles, and property type, might determine the relationship between customer service and real estate performance. The paper concludes that further research is needed to isolate specific aspects of customer service that are most appreciated by customers. It suggests that the financial returns which accrue to landlords adopting a customer-focused approach might indeed be quantified, and suggests an appropriate method for such future research.

Bias or rationality? The case of UK commercial real estate investment

Purpose – The purpose of this paper is to test the hypothesis that investment decision making in the UK direct property market does not conform to the assumption of economic rationality underpinning portfolio theory. Design/methodology/approach – The developing behavioural real estate paradigm is used to challenge the idea that investor “man” is able to perform with economic rationality, specifically with reference to the analysis of the spatial dispersion of the entire UK “investible stock” and “investible locations” against observed spatial patterns of institutional investment. Location quotients are derived, combining different data sets. Findings – Considerably greater variation in institutional property holdings is found across the UK than would be expected given the economic and stock characteristics of local areas. This appears to provide evidence of irrationality (in the strict traditional economic sense) in the behaviour of institutional investors, with possible herding underpinning levels of investment that cannot be explained otherwise. Research limitations/implications – Over time a lack of distinction has developed between the cause and effect of comparatively low levels of development and institutional property investment across the regions. A critical examination of decision making and behaviour in practice could break this cycle, and could in turn promote regional economic growth. Originality/value – The entire “population” of observations is used to demonstrate the relationships between economic theory and investor performance exploring, for the first time, stock and local area characteristics.

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.

The influence of a decision support tool on real estate valuations

An appraisal task involves the rendering of market value, an unobservable and hypothetical construct. Direct feedback against this objective is typically not possible, so alternative feedback such as confirmation of previous appraised values may be employed. This may alter the appraiser’s perception of the valuation objective leading to divergence from the appraisal normative model. The real estate literature suggests appraisers have been susceptible to the influence of previous appraised values, often resulting in biased valuations. This research focuses on the efficacy of a decision support tool in eliminating or subduing this bias in the appraisal process.

Futures trading, spot price volatility and market efficiency: evidence from European real estate securities futures

In 2007 futures contracts were introduced based upon the listed real estate market in Europe. Following their launch they have received increasing attention from property investors, however, few studies have considered the impact their introduction has had. This study considers two key elements. Firstly, a traditional Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, the approach of Bessembinder & Seguin (1992) and the Gray’s (1996) Markov-switching-GARCH model are used to examine the impact of futures trading on the European real estate securities market. The results show that futures trading did not destabilize the underlying listed market. Importantly, the results also reveal that the introduction of a futures market has improved the speed and quality of information flowing to the spot market. Secondly, we assess the hedging effectiveness of the contracts using two alternative strategies (naïve and Ordinary Least Squares models). The empirical results also show that the contracts are effective hedging instruments, leading to a reduction in risk of 64 %.

Forecasting real estate returns using financial spreads

This paper examines the predictability of real estate asset returns using a number of time series techniques. A vector autoregressive model, which incorporates financial spreads, is able to improve upon the out of sample forecasting performance of univariate time series models at a short forecasting horizon. However, as the forecasting horizon increases, the explanatory power of such models is reduced, so that returns on real estate assets are best forecast using the long term mean of the series. In the case of indirect property returns, such short-term forecasts can be turned into a trading rule that can generate excess returns over a buy-and-hold strategy gross of transactions costs, although none of the trading rules developed could cover the associated transactions costs. It is therefore concluded that such forecastability is entirely consistent with stock market efficiency.

Linkages between property asset returns and interest rates: evidence for the UK

This paper considers the effect of short- and long-term interest rates, and interest rate spreads upon real estate index returns in the UK. Using Johansen's vector autoregressive framework, it is found that the real estate index cointegrates with the term spread, but not with the short or long rates themselves. Granger causality tests indicate that movements in short term interest rates and the spread cause movements in the returns series. However, decomposition of the forecast error variances from VAR models indicate that changes in these variables can only explain a small proportion of the overall variability of the returns, and that the effect has fully worked through after two months. The results suggest that these financial variables could potentially be used as leading indicators for real estate markets, with corresponding implications for return predictability.

The cyclical relations between traded property stock prices and aggregate time-series

This paper examines the cyclical regularities of macroeconomic, financial and property market aggregates in relation to the property stock price cycle in the UK. The Hodrick Prescott filter is employed to fit a long-term trend to the raw data, and to derive the short-term cycles of each series. It is found that the cycles of consumer expenditure, total consumption per capita, the dividend yield and the long-term bond yield are moderately correlated, and mainly coincident, with the property price cycle. There is also evidence that the nominal and real Treasury Bill rates and the interest rate spread lead this cycle by one or two quarters, and therefore that these series can be considered leading indicators of property stock prices. This study recommends that macroeconomic and financial variables can provide useful information to explain and potentially to forecast movements of property-backed stock returns in the UK.

Does orthogonalization really purge equity based property valuations of their general stock market influences?

This paper uses a recently developed nonlinear Granger causality test to determine whether linear orthogonalization really does remove general stock market influences on real estate returns to leave pure industry effects in the latter. The results suggest that there is no nonlinear relationship between the US equity-based property index returns and returns on a general stock market index, although there is evidence of nonlinear causality for the corresponding UK series.

The impact of economic and financial factors on UK property performance

This paper employs a vector autoregressive model to investigate the impact of macroeconomic and financial variables on a UK real estate return series. The results indicate that unexpected inflation, and the interest rate term spread have explanatory powers for the property market. However, the most significant influence on the real estate series are the lagged values of the real estate series themselves. We conclude that identifying the factors that have determined UK property returns over the past twelve years remains a difficult task.

Threshold autoregressive and Markov switching models: an application to commercial real estate

Although financial theory rests heavily upon the assumption that asset returns are normally distributed, value indices of commercial real estate display significant departures from normality. In this paper, we apply and compare the properties of two recently proposed regime switching models for value indices of commercial real estate in the US and the UK, both of which relax the assumption that observations are drawn from a single distribution with constant mean and variance. Statistical tests of the models' specification indicate that the Markov switching model is better able to capture the non-stationary features of the data than the threshold autoregressive model, although both represent superior descriptions of the data than the models that allow for only one state. Our results have several implications for theoretical models and empirical research in finance.

What Tenants Want: UK occupiers’ requirements when renting commercial property and strategic implications for landlords

Businesses need property in order to generate turnover and profits. If real estate owners are to be able to provide properties and related services that are desirable, it is crucial that they understand tenants’ requirements and preferences. Changes in the way businesses operate might well lead to an overall reduction in space requirements in all sectors. Faced with reductions in demand, landlords will find themselves in an increasingly competitive marketplace for tenants. Of the array of strategies available to landlords, what strategies should they employ for maximum effect? This paper examines what United Kingdom tenants want from commercial property (retail, industrial and office). The first part provides an analysis of data from several hundred interviews with occupiers of commercial properties owned by some of the largest UK real estate investment companies. Results are presented for each of the asset classes separately. The second part compares the findings with previous research and discusses the strategic implications for landlords.

Treating the Tenant as a Customer: can good service improve real estate performance?

Customer Relationship Management (CRM) theory suggests that good customer service results in satisfied customers, who in turn are more likely to remain loyal and recommend the service provider to others. Applied to real estate, this theory implies that landlords should see a return on any investment in the service they give to tenants, in the form of increased lease renewal rates and fewer void periods, achieved without compromising rents. This paper examines determinants of occupier satisfaction, and investigates the relationship between occupier satisfaction and property performance, using measures such as capital growth, income return, lease renewal rates and total return. The analysis is based upon a pilot study using occupier satisfaction responses from around 2500 interviewees based in multi-tenanted offices, shopping centres and retail warehouses on out-of-town retail parks in the UK. The analysis is being extended to cover a larger sample for the author’s PhD. Part 1 of the analysis examines occupier satisfaction, whilst Part 2 considers its impact on property performance.

Measuring European property investment performance: comparing different approaches

Purpose – Price indices for commercial real estate markets are difficult to construct because assets are heterogeneous, they are spatially dispersed and they are infrequently traded. Appraisal-based indices are one response to these problems, but may understate volatility or fail to capture turning points in a timely manner. This paper estimates “transaction linked indices” for major European markets to see whether these offer a different perspective on market performance. The paper aims to discuss these issues. Design/methodology/approach – The assessed value method is used to construct the indices. This has been recently applied to commercial real estate datasets in the USA and UK. The underlying data comprise appraisals and sale prices for assets monitored by Investment Property Databank (IPD). The indices are compared to appraisal-based series for the countries concerned for Q4 2001 to Q4 2012. Findings – Transaction linked indices show stronger growth and sharper declines over the course of the cycle, but they do not notably lead their appraisal-based counterparts. They are typically two to four times more volatile. Research limitations/implications – Only country-level indicators can be constructed in many cases owing to low trading volumes in the period studied, and this same issue prevented sample selection bias from being analysed in depth. Originality/value – Discussion of the utility of transaction-based price indicators is extended to European commercial real estate markets. The indicators offer alternative estimates of real estate market volatility that may be useful in asset allocation and risk modelling, including in a regulatory context.

Residential property loans and bank performance during property price booms: evidence from Europe

Understanding the performance of banks is of the utmost importance due to the impact the sector may have on economic growth and financial stability. Residential mortgage loans constitute a large proportion of the portfolio of many banks and are one of the key assets in the determination of their performance. Using a dynamic panel model, we analyse the impact of residential mortgage loans on bank profitability and risk, based on a sample of 555 banks in the European Union (EU-15), over the period from 1995 to 2008. We find that an increase in residential mortgage loans seems to improve bank’s performance in terms of both profitability and credit risk in good market, pre-financial crisis, conditions. These findings may aid in explaining why banks rush to lend to property during booms because of the positive effect it has on performance. The results also show that credit risk and profitability are lower during the upturn in the residential property cycle.