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

Evidence of cycles in European commercial real estate markets and some hypotheses

In this paper, we seek to achieve four objectives. First, we provide some contextual material concerning the performance of the UK real estate market relative to stocks and bonds over a long period. Second, we provide UK – and some non-UK European - evidence of the tendency for property demand, supply, prices and returns to fluctuate around their long term trends or averages. Third, we briefly examine some hypotheses which suggest institutional contributions to property cycles in European markets. Fourth, we suggest some reasons why the future may not be as cyclical as the past.

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.

Commercial property loan valuations in the UK : the changing landscape of practice and liability

This paper is the first of two which aim to examine the major legal liability implications of changes to the commercial property loan valuation process caused by the recession in the UK property market and to make recommendations to valuers and their professional institutions to improve the quality of the process and the result. This paper identifies the market background to commercial property lending and discusses the implications of the falls in value for lenders and valuers. These include two major strands; first, the outcome of discussions between the representative bodies of these two groups and, second, the increasing litigation caused by lenders suing valuers for professional negligence. The discussions between representative groups have driven a debate on the valuation process leading to a number of reports and guidance notes. This paper discusses the outcomes paying particular attention to the basis of valuation for loan purposes and the provision of additional information in valuation reports. This paper also reviews the legal framework which influences the relationship between the lenders and valuers and discusses the duty of care. The role of instructions in the valuation process, the significance of the identity of the person to be advised and the possibility of a conflict of interest arising are all considered. The paper also addresses the issue of the standards required of a commercial loan valuer, including how this is interpreted by the courts and the legal status of professional guidance notes. The paper concludes by identifying potential areas for dispute within the loan valuation process and raising a number of research questions concerning the operation of this process which are addressed in a following paper.

Commercial property loan valuations in the UK : implications of current trends in practice and liability

This paper is the second of two papers which aim to examine the major legal liability implications of changes to the commercial property loan valuation process caused by the recession in the UK property market and to make recommendations to valuers and their professional institutions to improve the quality of the process and the result. The objectives of this paper are to address a number of the practical implications of changes to the loan valuation process within the context of legal liability. The results of an interview survey of lenders and valuers are reported and analysed. The survey examined the loan valuation process including the selection and instruction of valuers, bases of valuation and valuation reporting. In the selection and instruction process, the findings of the survey reveal two potential problems within the valuer/lender relationship. First, valuers still occasionally accept instructions from borrowers and this could lead to a conflict of interest as lenders may rely on the survey. Second, the occasional lack of formal instructions prior to the delivery of reports casts doubt on the valuer’s ability to correctly identify the needs of clients. Regarding the basis of valuation, it was found that valuers are providing valuations on bases which they do not think are appropriate. Valuers may be legally liable if they do not inform clients of their reservations and this situation must be urgently addressed. The survey also confirms previous research that valuation reports are considered to be light on contextual information concerning markets. The paper concludes by making a number of specific recommendations concerning possible improvements to the commercial property loan valuation process.

Portfolio size and the reduction of dispersion: the case of the United Kingdom commercial real estate market

This paper investigates the potential benefits and limitations of equal and value-weighted diversification using as the example the UK institutional property market. To achieve this it uses the largest sample (392) of actual property returns that is currently available, over the period 1981 to 1996. To evaluate these issues two approaches are adopted; first, an analysis of the correlations within the sectors and regions and secondly simulations of property portfolios of increasing size constructed both naively and with value-weighting. Using these methods it is shown that the extent of possible risk reduction is limited because of the high positive correlations between assets in any portfolio, even when naively diversified. It is also shown that portfolios exhibit high levels of variability around the average risk, suggesting that previous work seriously understates the number of properties needed to achieve a satisfactory level of diversification. The results have implications for the development and maintenance of a property portfolio because they indicate that the achievable level of risk reduction depends upon the availability of assets, the weighting system used and the investor’s risk tolerance.

The challenge of self-regulation in commercial property leasing: a study of lease codes in the UK.

Purpose – UK Government policy to address perceived market failure in commercial property leasing has largely been pursued through industry self-regulation. Yet, it is proving difficult to assess whether self-regulation on leasing has been a “success”, or even to determine how to evaluate this. The purpose of this paper is to provide a framework for this and a clearer understanding of self-regulation in commercial leasing. Design/methodology/approach – A literature review suggests key criteria to explain the (in)effectiveness of self-regulation. UK lease codes are analysed in the light of this literature, drawing on previous research carried out by the authors on the operation of these codes. Findings – Lease codes appear to be failing as an effective system of self-regulation. While there are influential market actors championing them, the fragmentation of the leasing process lessens this influence. The structures are not there to ensure implementation, monitor compliance and record views of affected stakeholders. Research limitations/implications – This work adds to the literature on self-regulation in general, and provides an insight into its operation in a previously unexplored industry. Research is needed into the experience of other countries in regulating the property industry by voluntary means. Social implications – There are institutional limitations to self-regulation within the property industry. This has implications for policy makers in considering the advantages and limitation of using a voluntary solution to achieve policy aims within the commercial leasing market. Originality/value – This paper provides a first step in considering the lease codes in the wider context of industry self-regulation and is relevant to policy makers and industry bodies.

Rental depreciation and capital expenditure in the UK commercial real estate market, 1993–2009

This paper identifies the long-term rental depreciation rates for UK commercial properties and rates of capital expenditure incurred to offset depreciation over the same period. It starts by reviewing the economic depreciation literature and the rationale for adopting a longitudinal method of measurement, before discussing the data used and results. Data from 1993 to 2009 were sourced from Investment Property Databank and CB Richard Ellis real estate consultants. This is used to compare the change in values of new buildings in different locations with the change in values of individual properties in those locations. The analysis is conducted using observations on 742 assets drawn from all major segments of the commercial real estate market. Overall rental depreciation and capital expenditure rates are similar to those in other recent UK studies. Depreciation rates are 0.8% pa for offices, 0.5% pa for industrial properties and 0.3% pa for standard retail properties. These results hide interesting variations at a segment level, notably in retail where location often dominates value rather than the building. The majority of properties had little (if any) money spent on them over the last 16 years, but those subject to higher rates of expenditure were found to have lower depreciation rates.

Building communities: reducing energy use in tenanted commercial property

Reducing energy use in tenanted commercial property requires a greater understanding of ‘buildings as communities’. Tenanted commercial properties represent: (1) the divergent communities that share specific buildings; and (2) the organizational communities represented by multi-site landlord and tenant companies. In any particular tenanted space the opportunity for environmental change is mediated (hindered or enabled) through the lease. This discussion draws on theoretical and practical understandings of (1) the socio-legal relationships of landlords, tenants and their advisors; (2) the real performance of engineering building services strategies to improve energy efficiency; (3) how organizational cultures affect the ability of the sector to engage with energy-efficiency strategies; and (4) the financial and economic basis of the relationship between owners and occupiers. The transformational complexity stems from: (1) the variety of commercial building stock; (2) the number of stakeholders (solicitors, investors, developers, agents, owners, tenants and facilities managers); (3) the fragmentation within the communities of practice; and (4) leasehold structures and language. An agenda is proposed for truly interdisciplinary research that brings together both the physical and the social sciences of energy use in buildings so that technological solutions are made effective by an understanding of the way that buildings are used and communities behave.

Facing the future: energy performance certificates and commercial property

Purpose – The paper aims to present the findings of a “situation review” of the Energy Performance of Buildings Directive (EPBD), focusing on energy performance certificates (EPCs) to highlight areas of specific importance for the UK property investment community. The paper is based on research commissioned by the Investment Property Forum (IPF) and funded through the IPF Research Programme (2006-2009). Design/methodology/approach – Interviews were undertaken with experts from the fields of property investment and building engineering. The interviews were undertaken with to identify: the current knowledge of EPCs in the property investment sector; key issues with practical implementation of the legislation; and perceptions of the potential impacts of legislation, particularly in relation to value stakeholder and behaviour. Findings – The paper finds that, although the regulations have been published, there is still a need for clarification in the marketplace with regard to some of the detail of regulations and the certification process. The following areas are of most concern to property investors: costs of surveys; potential difficulties with the process; and a shortage of assessors. With respect to these impacts it is becoming clear that investors who have not yet started considering the EPBD and its requirements within their strategy are likely to face difficulties in the short term. The most significant value-related impacts of EPBD are expected to be value differentiation of properties and “price chipping” against the rental or capital value of the property, where an occupier or potential purchaser will use the recommendations contained within an EPC to force a reduction in value. The latter is expected to emerge in the short term, whereas the former is expected to be realised over the medium to long term. Both these impacts have potentially significant implications for property investment holdings and also future investment behaviour.

A kinetic model for the formation of acrylamide during the finish-frying of commercial French fries

Acrylamide is formed from reducing sugars and asparagine during the preparation of French fries. The commercial preparation of French fries is a multi-stage process involving the preparation of frozen, par-fried potato strips for distribution to catering outlets where they are finish fried. The initial blanching, treatment in glucose solution and par-frying steps are crucial since they determine the levels of precursors present at the beginning of the finish frying process. In order to minimize the quantities of acrylamide in cooked fries, it is important to understand the impact of each stage on the formation of acrylamide. Acrylamide, amino acids, sugars, moisture, fat and color were monitored at time intervals during the frying of potato strips which had been dipped in varying concentrations of glucose and fructose during a typical pretreatment. A mathematical model of the finish-frying was developed based on the fundamental chemical reaction pathways, incorporating moisture and temperature gradients in the fries. This showed the contribution of both glucose and fructose to the generation of acrylamide, and accurately predicted the acrylamide content of the final fries.

Kinetic model for the formation of acrylamide during the finish-frying of commercial French fries

Acrylamide is formed from reducing sugars and asparagine during the preparation of French fries. The commercial preparation of French fries is a multistage process involving the preparation of frozen, par-fried potato strips for distribution to catering outlets, where they are finish-fried. The initial blanching, treatment in glucose solution, and par-frying steps are crucial because they determine the levels of precursors present at the beginning of the finish-frying process. To minimize the quantities of acrylamide in cooked fries, it is important to understand the impact of each stage on the formation of acrylamide. Acrylamide, amino acids, sugars, moisture, fat, and color were monitored at time intervals during the frying of potato strips that had been dipped in various concentrations of glucose and fructose during a typical pretreatment. A mathematical model based on the fundamental chemical reaction pathways of the finish-frying was developed, incorporating moisture and temperature gradients in the fries. This showed the contribution of both glucose and fructose to the generation of acrylamide and accurately predicted the acrylamide content of the final fries.

Transaction based indices for the UK commercial real estate market: an exploration using IPD transaction data

The nature of private commercial real estate markets presents difficulties for monitoring market performance. Assets are heterogeneous and spatially dispersed, trading is infrequent and there is no central marketplace in which prices and cash flows of properties can be easily observed. Appraisal based indices represent one response to these issues. However, these have been criticised on a number of grounds: that they may understate volatility, lag turning points and be affected by client influence issues. Thus, this paper reports econometrically derived transaction based indices of the UK commercial real estate market using Investment Property Databank (IPD) data, comparing them with published appraisal based indices. The method is similar to that presented by Fisher, Geltner, and Pollakowski (2007) and used by Massachusett, Institute of Technology (MIT) on National Council of Real Estate Investment Fiduciaries (NCREIF) data, although it employs value rather than equal weighting. The results show stronger growth from the transaction based indices in the run up to the peak in the UK market in 2007. They also show that returns from these series are more volatile and less autocorrelated than their appraisal based counterparts, but, surprisingly, differences in turning points were not found. The conclusion then debates the applications and limitations these series have as measures of market performance.