George Matysiak

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.

Sticky Valuations, Aggregation Effects and Property Indices

Previous studies on real estate smoothing have generally focused on the second moment of returns for individual properties. Although this body of research has developed plausible reasons for explaining the observed lower risk associated with real estate, no explanation has, however, been offered to account for the large difference in serial correlation at the individual property level compared with the index level. This article addresses this issue and also offers an explanation for the difference in serial correlation observed with different frequency real estate indices. Employing the framework developed by Holbrook Working (1960), we argue that the high levels of serial correlation typically observed in real estate indices results from a combination of random and sticky appraisals that induce cross-correlations between the component returns. Using the concept of sticky values we question the results of Lai and Wang (1998) in which they argue that the variance of appraisal-based returns should always be greater than true returns. We argue that a pragmatic conclusion regarding volatility should be conditioned on the underlying stochastic processes. We draw a distinction between serial cross-sectional and temporal sticky appraisal processes that influence smoothing at the index and individual property levels. Our results indicate that smoothing does not appear to be a serious issue at the individual property level. However, when different appraisal processes are aggregated into an index the underlying cross-correlation between those processes can induce high levels of smoothing.

Valuation uncertainty and the Mallinson Report

This paper addresses uncertainty in valuations in relation to the issues raised by the Mallinson Report . It shows that valuers have approximately 1 chance in 10 of achieving values within +/- 5% of the mean value. This improves to 1 in 5 if the range is increased to +/- 10%. These figures are, however, based on average properties within each sector and are probably much lower than generally believed. Valuers may, however, achieve better or worse performance when considering individual properties. In an ex ante framework it is shown that the main influence on variability in valuations switches from growth to total returns as capital values decline. Improving the standard error of forecasts can lead to a significant improvement in the uncertainty of valuations. This points to the need for better research. The levels of valuation uncertainty reported in this paper do not imply any inefficiency in the way valuations are prepared. Differences of opinion are important in order to encourage the development of an active property market. Valuation uncertainty as identified in the Mallinson Report is not, therefore, a serious issue. A more serious problem concerns errors in valuation.

Identifying short‐term leading indicators for real estate rental performance

This paper looks at the application of economic and financial series in forecasting IPD monthly rental series. The approach follows that employed in classical business cycle work that seeks to decompose series into trend, cyclical and noise components and is the first time that it has been applied to IPD monthly data. Trend extraction is obtained by means of the Hodrick‐Prescott filter. Several potential indicator series are investigated together with their lead characteristics. The short‐term forecasts of these series are compared with naive methods and a composite indicator. The results show the naive methods, especially the Holt‐Winters method, and certain leading indicator series produce satisfactory short‐term forecasts, but the success is both sector and time‐dependent. This suggests that it is a worthwhile endeavour in identifying potential leading indicator series. The methodology presented in this paper should be seen as complementing existing approaches that employ standard econometric procedures in modelling rental growth.

Forecasting UK commercial real estate cycle phases with leading indicators: a probit approach

This paper examines the significance of widely used leading indicators of the UK economy for predicting the cyclical pattern of commercial real estate performance. The analysis uses monthly capital value data for UK industrials, offices and retail from the Investment Property Databank (IPD). Prospective economic indicators are drawn from three sources namely, the series used by the US Conference Board to construct their UK leading indicator and the series deployed by two private organisations, Lombard Street Research and NTC Research, to predict UK economic activity. We first identify turning points in the capital value series adopting techniques employed in the classical business cycle literature. Probit models are then estimated using the leading economic indicators as independent variables and forecast the probability of different phases of capital values, that is, periods of declining and rising capital values. The forecast performance of the models is tested and found to be satisfactory. The predictability of lasting directional changes in property performance represents a useful tool for real estate investment decision-making.

Agreement and Accuracy in Consensus Forecasts of the UK Commercial Property Market

Property forecasts are an integral part of the property investment process at the strategic, tactical and individual asset levels. This study investigates the nature, extent and patterns of disagreement and uncertainty in the forecasts of UK property investors and their advisors. In this paper, the Investment Property Forums consensus forecasts from 1999–2004 are analysed. The study finds that property forecasting organizations tend to exhibit the characteristics of a consensus, potentially indicating a herding bias among forecasting organizations. Given high levels of agreement and high levels of error in the consensus forecasts, uncertainty in the property forecasts of the individual organizations seem to be primarily generated by common factors rather than by the individual forecasting organization itself. This is not a unique feature of property market forecasters as non‐property forecasters display similar patterns. A key source of uncertainty in the property market forecasts of capital and total returns seems to have been due to problems of forecasting yield shifts. The analysis suggests that there are inefficiencies in property market forecasts.

Client perception of property investment valuation reports in the UK

Property appraisers and the appraisal/valuation process have recently been the focus of attention in many parts of the world. This paper concentrates on one part of the valuation process: the final valuation report submitted to the client. The paper presents the results of a questionnaire survey conducted in December 1994 of clients who commission valuation reports from external valuers in the United Kingdom (UK). Generally, UK clients are satisfied with valuation reports received from external valuers. Where the users of valuation reports are themselves valuers, the level of satisfaction is more pronounced. However, there is a common criticism that valuers provide more information on the factual elements within a report - for example, the physical location and the layout and measurements of the building - than they do on the valuation methodology and the state of the market. While over half the respondents wanted to see more regulation of valuers through professional institutional guidelines, very few requested more government regulation. The findings imply that there is room for improvement in the provision of information within valuation reports. Valuers need to provide additional information in valuation reports concerning conditions and trends in property and wider markets, and provide comparable transactions data on which the valuation is based. Research should be focused on how such information can be provided in a market that restricts data and where valuers are increasingly litigated against for alleged professional negligence.

Analysing the performance of nonlisted real estate funds: a panel data analysis

The rapid growth of nonlisted real estate funds over the last several years has contributed towards establishing this sector as a major investment vehicle for gaining exposure to commercial real estate. Academic research has not kept up with this development, however, as there are still only a few published studies on nonlisted real estate funds. This article aims to identify the factors driving the total return over a 7-year period. Influential factors tested in our analysis include the weighted underlying direct property returns in each country and sector as well as fund size, investment style gearing and the distribution yield. Furthermore, we analyse the interaction of nonlisted real estate funds with the performance of the overall economy and that of competing asset classes and find that lagged Gross Domestic Product (GDP) growth and stock market returns as well as contemporaneous government bond rates are significant and positive predictors of annual fund performance.

A note on the periodic conversion of measures of risk

The conversion of monthly or quarterly standard deviations to their annual equivalent presents few problems if the underlying returns series is serially uncorrelated. If however the same procedure is used to convert serially correlated returns then the annual equivalent risk measures may be seriously understated. Using continuous rates of return this paper presents a compact solution which makes allowance for serial correlation and can be used for making the conversion over any interval.

Commercial property investment and the Pensions Act 1995

Looks at the role of property in pensions funds pre and post minimum funding requirement (MFR). Suggests that while property has a role as a matching asset in pension funds, this role has declined in recent years. This is partly because of poor performance but also because other asset categories can perform the role that property has played. The introduction of the MFR may make property still less attractive to pension funds because of the equity/gilt valuation benchmark. However, we expect any effect in the short term to be limited.