Colin Lizieri

The Workings of the London Office Market

This paper presents estimates of an equilibrium-based dynamic adjustment model of the office market, using supply and demand relationships to link construction, absorption, vacancies, and rents to employment growth and real interest rates. The model is estimated using data from the central London office market over the 1976-96 period. The model is shown to dynamically track the market well and the severe 1985-96 cycle is shown to be related to the cycle in employment growth and the surge in real interest rates. The latter affects both construction and rental adjustment.

The Inflation Hedging Characteristics of US and UK Investments: A Multi-Factor Error Correction Approach

Historic analysis of the inflation hedging properties of stocks has produced anomalous results, with stocks often appearing to offer a perverse hedge. This has been attributed to the impact of real and monetary shocks to the economy, which influence both inflation and asset returns. It has been argued that real estate should provide a better hedge: however, empirical results have been mixed. This paper explores the relationship between commercial real estate returns and economic, fiscal and monetary factors and inflation for US and UK markets. Comparative analysis of general equity and small capitalization stock returns is carried out with inflation divided into expected and unexpected components. The analyses are undertaken using an error correction approach. In the long run, once real and monetary variables are included, asset returns are positively linked to anticipated inflation but not to inflation shocks. Adjustment processes are, however, gradual and not within period. Real estate returns, particularly private market returns, exhibit characteristics that differ from those of stocks.

Interactions Between Property and Equity Markets: An Investigation of Linkages in the United Kingdom 1972–1992

Two strands of real estate research—that concerned with the relationships between securitized real estate and the underlying market and that dealing with the role of property in the wider economy—rarely are considered together. The paper utilizes the U.K. equity market and property company share data to explore the relationships between real estate and the rest of the economy, using a two-sector analytic model. Causality analysis suggests that the wider economy leads the real estate market in the short term but that, with a longer lag structure, positive real estate returns may point to negative future returns in the rest of the economy. This provides weak confirmatory evidence for theories of capital switching between sectors.

Diversification When It Hurts? The Joint Distributions of Real Estate and Equity Markets

This article examines claims about the diversification benefits of real estate. In particular, does real estate investment in a mixed asset portfolio provide protection when other asset classes are performing badly? Conventional portfolio strategy models utilising covariance statistics may result in a misallocation of capital if correlation structures between assets differ across the distribution of returns. Models of asymmetric dependence using the copula function, drawn from the recent finance literature are used to examine the relationships between real estate and equity at different points in their joint return distributions. For both UK and Global markets, real estate securities and common equities are shown to exhibit strong tail dependence – particularly in the negative tail. This suggests that real estate securities offer, at best, limited diversification protection when it is needed most – when other asset markets are falling. This has implications for allocation strategies in mixed asset portfolios. 1. Paper originally presented to the European Real Estate Society Annual Conference, Dublin, June 2005.

New business practices and the corporate property portfolio: how responsive is the UK property market?

It has been asserted that business reorganization and new working practices are transforming the nature of demand for business space. Downsizing, delayering, business process reengineering and associated initiatives alter the amount, type and location of space required by firms. It also has implications for the contractual arrangements. Drawing from UK research, the paper demonstrates that, although new working practices are widespread, their current impact on the corporate property portfolio is muted. However, these changes have altered the way corporate property managers think about their portfolios with a clearer view of the divide between their core and peripheral property requirements. The inflexibility in UK market structures are felt to constrain the supply of a diversity of space required to meet the breadth of occupier requirements. Nevertheless there is increasing evidence that change is occurring which may have a profound impact on the market structure in the longer term.

Homogeneous Commercial Property Market Groupings and Portfolio Construction in the United Kingdom

Property portfolios are traditionally constructed by diversifying across geographical areas, property types, or a combination of both. In the United Kingdom it is normal practice to use regions rather than towns or local market areas as the geographical divisions. The authors use cluster analysis to construct homogeneous groups from 157 UK local markets, by means of commercial property returns. The results show strong property-type dimensions and only very broad geographical dimensions in the clusters. These clusters are found, in general, to have temporal stability with changes in cluster membership being explained by the changing economic geography of the United Kingdom. The cluster-derived groupings are used to derive efficient investment frontiers and are compared with frontiers based on conventional heuristic groupings. It is shown that strategies based on parsimonious cluster-based groupings, appropriate for smaller investors, generate results that are comparable with those of conventional groupings and capture the main drivers of property performance.

The Spatial Dimensions of the Investment Performance of UK Commercial Property

In this paper, cluster analytical techniques are used to examine dimensions of diversification in UK commercial property markets. A variety of techniques are used on a dataset which contains property returns for 156 property markets (67 retail locations, 64 office locations and 25 industrial locations). The results strongly suggest that property type is the most important dimension in determining different market behaviour. There is also evidence of a geographical factor, but one which does not conform to the conventional 11-region administrative classification but rather suggests a London factor.

International property portfolio strategies

Formal portfolio selection strategies based on modern portfolio theory have increasingly been applied to real estate markets, despite the difficulties posed by the characteristics of property as an investment asset. As markets have “gone global”, so portfolio theory has been used to define international property portfolio strategies. Suggests that many of these studies are flawed, in that they neglect both methodological developments in portfolio theory and, critically, the economic fundamentals that drive property markets. This can lead to the adoption of investment strategies that create portfolios with a high exposure to risk. Outlines alternative approaches to global real estate investment.

Means, motive and opportunity? Disentangling client influence on performance measurement appraisals

This paper investigates the extent to which clients were able to influence performance measurement appraisals during the downturn in commercial property markets that began in the UK during the second half of 2007. The sharp change in market sentiment produced speculation that different client categories were attempting to influence their appraisers in different ways. In particular, it was recognised that the requirement for open‐ended funds to meet redemptions gave them strong incentives to ensure that their asset values were marked down to market. Using data supplied by Investment Property Databank, we demonstrate that, indeed, unlisted open‐ended funds experienced sharper drops in capital values than other fund types in the last quarter of 2007, after the market turning point and at the time when redemptions were at their highest. These differences are statistically significant and cannot simply be explained by differences in portfolio composition. Client influence on appraisal forms one possible explanation of the results observed: the different pressures on fund managers resulting in different appraisal outcomes.

Ownership, Occupation and Risk: A View of the City of London Office Market

Office returns in the City of London are more volatile than in other UK markets. This volatility may reflect fluctuations in capital flows associated with changing patterns of ownership and the growing linkage between real estate and financial markets in the City. Using current and historical data, patterns of ownership in the City are investigated. They reveal that overseas ownership has grown markedly since 1985, that owners are predominantly FIRE-sector firms and that there are strong links between ownership and occupation. This raises concerns about future volatility and systemic risk in a market strongly influenced by the cyclical behaviour and shocks of the international financial system.