Allison Orr

Local Commercial and Industrial Rental Trends and Property Market Constraints

The paper assesses the differential impact of property market constraints on the long-run rental trends in each of the commercial and industrial property market sectors. The perceived view that supply constraints are very inelastic in the retail sector, less so for offices and elastic for industrial properties is reconsidered. A series of hypotheses are derived and tested by an analysis of variance technique which decomposes rental change into local and national components. The paper concludes that changes in the pattern of spatial activity and specific property market processes have resculptured the nature of supply constraints. The result is that the spectrum of supply elasticities has narrowed.

Understanding Property Market Dynamics: Insights from Modelling the Supply-Side Adjustment Mechanism

The volatility of commercial property markets in the United Kingdom has stimulated the development of explanatory models of ‘price’ determination. These models have tended to focus on the demand-side as the driver of change. A corollary of this is that, despite the fact that construction lags are known to exacerbate cyclical fluctuations, the supply-side adjustment mechanism has been subject to relatively little research effort. In this paper the authors develop a new model of commercial property markets in the United Kingdom. The model is adapted from Poterbas two-equation asset-market approach to modelling the housing market. The first equation is an arbitrage relationship where the return on property is made up of rent, as determined in the user market for property services, and the capital gain, which is dependent on the return on alternative assets. This can be interpreted as a ‘stock’ demand equation. The second equation explains that ‘flow’ supply is determined by real capital values. The long-run empirical generalisation of the two-equation model allows the authors to estimate two key behavioural parameters required in explaining supply-side adjustment to market change. First, the authors interpret the coefficient on the capital value variable in the supply equation as an estimate of the long-run ‘price’ elasticity of supply. Second, from the demand equation, they estimate the extent to which new supply can act as an ‘automatic stabiliser’ on property values. It is argued that although increases in demand drive up property values, new development is also initiated and will, in turn, dampen down the growth in real capital values. The equations are estimated for the office, industrial, and retail sectors. Although there are no comparable estimates of supply elasticities in the real estate economics literature, the results are generally consistent with prior knowledge. Estimates of the stabiliser effect are also plausible and, taken together, the supply-side parameters help provide insights required in understanding property market dynamics in the last twenty-five years.

The suitability of Public Private Partnerships in the provision of sustainable housing in China

China faces a shortfall in its provision of affordable housing. This paper explores the potential to use Public Private Partnerships (PPP) to address these supply problems. A review of the housing market and an examination of its historical development is presented. This is followed by an examination of PPP approaches and the rationale underpinning them. A survey of state and private sector practitioners is undertaken to evaluate the appropriateness of PPP in the Chinese housing sector. The results highlight PPP is viable but there are a number of institutionally constraints that must be overcome to achieve the full benefits.

A comparison of UK equity and property duration

This paper considers the duration of property and equity. A general formula for duration of asset classes is derived. It is shown that calculations which assume, usually implicitly, that the flowthrough of inflation to cash flow is zero, produce misleadingly high durations for property and equities. These are typically in the range 15-25 years. Simulations using the formulae show that property has some bond-like characteristics. The results indicate that, for realistic flow-through rates, equities have a higher duration than property. The flow-through rate is the most important variable in the estimation of equities. Using historical data, equity duration is estimated at 8.65 years and propertys at 3.15 years. These are substantially lower than those commonly cited. If these values can be substantiated, and if higher values are used in practice, portfolio immunization strategies may need to be reconsidered.

The Impact of Carbon Emission Reducing Design Features on Office Occupiers’ Choice of Premises

Energy saving measures, if incorporated into existing and new buildings, can help the UK to achieve its ambitious goal to reduce carbon emissions by 80 per cent by 2050. Yet, the penetration of such technologies has been slow in the commercial real estate market. This paper examines the attitudes and preferences of office end users and their acceptance of carbon emission reducing technologies. It employs conjoint analysis to model the real estate decision-making of 150 respondents who claimed to have an input into their organisation’s choice of premises. The findings demonstrate that functionality and accessibility remain top priorities in occupiers’ choice of premises. Lower rents, improved corporate image and productivity are revealed as attributes that could compensate occupiers for energy-efficient attributes that restrict control over internal environment and operation of equipment. The paper discusses instruments to promote greater acceptance and penetration of carbon emission reducing design features in the office market.

Time on the market and commercial property prices

Property markets are considered efficient when the market price of a transacted property equates with its market worth. If this condition holds then identical properties should sell or let for the same price. However, properties are heterogeneous, and information and operational constraints exist. Consequently, events in the transaction process and factors like time on the market, buyer and seller psychology and agent behaviour influence property prices, whereas in a perfectly efficient market they would have no impact. This gives rise to similar units selling for different prices. This paper examines the relationships between commercial property prices and time on the market for property. Tests fail to find evidence of a direct relationship between time on the market and transacted rents, time on the market and asking rents, and asking rents with transacted rents. The reason for the insignificant results could be because landlords would rather offer potential tenants non‐price incentives such as rent‐free periods, rent break clauses, shorter leases or fitting‐out costs to achieve a faster let than discount the agreed contractual rent. A more detailed examination of the physical, location and market conditions that determine the expected time on the market for a property to let is undertaken. Results suggest that the state of the property market is an important influence on the time it takes to let a property, and concurs with the evidence found in housing studies. With the support of our empirical findings and evidence from the housing market, we conclude that including measures of non‐price incentives, landlords’ motivation, tenants’ characteristics, and search costs in our model may explain the relationship more fully.

Refining the real estate pricing model

Abstract Investment theory dictates that capitalisation (cap) rates for freehold real estate should be determined by the risk-free nominal rate of return plus the risk premium (RP) less the expected growth rate, with an allowance for depreciation. However, importing the concept of the RP from the capital markets fails to guide investors through the complexities of the asset, or enable exploration of purchaser preferences and behaviour. A refined pricing model for real estate is proposed, based on a concept termed a risk scale, to distinguish between macro (market) and micro (stock) determinants of risk and growth within the RP. This pricing model is estimated for a major global investment market, using a cross-sectional inter-temporal framework, with a data-set of 497 transactions in the London office sector over 2010 Q2–2012 Q3. Average cap rates are estimated at just over 5%, with asset-specific attributes dominating yield determination, with submarket quality and tenant covenant most important; and unexpired term insignificant, surprising during the ‘flight to safety’ characterising the period. International investors bought at lower cap rates, despite the ongoing economic and financial instability of the study period. Improving understanding of pricing behaviour and market transparency is important and may be advanced through the pricing model.

The sensitivity of UK commercial property values to interest rate changes

Duration and convexity measures are commonly applied in the management of bond portfolios to measure the sensitivity of asset values to changes in interest rates, enabling fund managers to manage their exposure to interest rate risk. Yet, there are no commonly accepted methods for applying the concepts of duration and convexity to equities and real estate, making it difficult for fund managers to analyse the exposure of multi-asset portfolios to interest rate risk (Blitzer & Dash, 2004). This paper contributes to this underdeveloped area of interest rate risk management by assessing the accuracy of using duration and convexity to measure the sensitivity of commercial property values in the UK to discount rate movements. Simulations confirm that property has duration and convexity characteristics similar to bonds. Our estimates overlap with duration figures estimated by Cairns and Wilkie (2010) for index-linked British government bonds over 15 years but are higher than their estimates for conventional bonds and five- to 15-year index-linked gilts. Perhaps more importantly, the paper demonstrates that duration is not sufficiently reliable enough to mitigate the interest rate risk attached to a property portfolio. The inclusion of convexity is necessary for effective interest rate immunisation strategies.

The revaluation of council tax bands: More than rearranging the deck chairs

The paper contributes to debate on the future of the council tax by focusing on the revaluation of council tax bands. Originally no revaluations were foreseen and as yet none have occurred in Britain. The paper argues there is a strong equity argument for frequent revaluations. An assessment of the potential impact of a revaluation is undertaken for a sample area of eleven local authority areas in Scotland. This research finds that while addressing the equity issue a revaluation is likely to create more disruption to local government and personal finances and the housing market than revaluations within a capital value based tax system.