Steven Devaney

Non‐Normal Real Estate Return Distributions by Property Type in the UK

Investment risk models with infinite variance provide a better description of distributions of individual property returns in the IPD UK database over the period 1981 to 2003 than normally distributed risk models. This finding mirrors results in the US and Australia using identical methodology. Real estate investment risk is heteroskedastic, but the characteristic exponent of the investment risk function is constant across time – yet it may vary by property type. Asset diversification is far less effective at reducing the impact of non‐systematic investment risk on real estate portfolios than in the case of assets with normally distributed investment risk. The results, therefore, indicate that multi‐risk factor portfolio allocation models based on measures of investment codependence from finite‐variance statistics are ineffective in the real estate context.

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.

Depreciation, income distribution and the UK REIT

Purpose – The purpose of this paper is to consider prospects for UK REITs, which were introduced on 1 January 2007. It specifically focuses on the potential influence of depreciation and expenditure on income and distributions.Design/methodology/approach – First, the ways in which depreciation can affect vehicle earnings and value are discussed. This is then set in the context of the specific rules and features of REITs. An analysis using property income and expenditure data from the Investment Property Databank (IPD) then assesses what gross and net income for a UK REIT might have been like for the period 1984‐2003.Findings – A UK REIT must distribute at least 90 per cent of net income from its property rental business. Expenditure therefore plays a significant part in determining what funds remain for distribution. Over 1984‐2003, expenditure has absorbed 20 per cent of gross income and been a source of earnings volatility, which would have been exacerbated by gearing.Practical implications – Expenditur...

Benchmarking and valuation issues in measuring depreciation for European office markets

Purpose – The paper addresses the practical problems which emerge when attempting to apply longitudinal approaches to the assessment of property depreciation using valuation‐based data. These problems relate to inconsistent valuation regimes and the difficulties in finding appropriate benchmarks.Design/methodology/approach – The paper adopts a case study of seven major office locations around Europe and attempts to determine ten‐year rental value depreciation rates based on a longitudinal approach using IPD, CBRE and BNP Paribas datasets.Findings – The depreciation rates range from a 5 per cent PA depreciation rate in Frankfurt to a 2 per cent appreciation rate in Stockholm. The results are discussed in the context of the difficulties in applying this method with inconsistent data.Research limitations/implications – The paper has methodological implications for measuring property investment depreciation and provides an example of the problems in adopting theoretically sound approaches with inconsistent in...

Risk reduction and diversification in UK commercial property portfolios

The issue of diversification in direct real estate investment portfolios has been widely studied in academic and practitioner literature. Most work, however, has been done using either partially aggregated data or data for small samples of individual properties. This paper reports results from tests of both risk reduction and diversification that use the records of 10,000+ UK properties tracked by Investment Property Databank. It provides, for the first time, robust estimates of the diversification gains attainable given the returns, risks and cross‐correlations across the individual properties available to fund managers. The results quantify the number of assets and amount of money needed to construct both ‘balanced’ and ‘specialist’ property portfolios by direct investment. Target numbers will vary according to the objectives of investors and the degree to which tracking error is tolerated. The top‐level results are consistent with previous work, showing that a large measure of risk reduction can be achieved with portfolios of 30–50 properties, but full diversification of specific risk can only be achieved in very large portfolios. However, the paper extends previous work by demonstrating on a single, large dataset the implications of different methods of calculating risk reduction, and also by showing more disaggregated results relevant to the construction of specialist, sector‐focussed funds.

The Changing Importance of Sector and Regional Factors in Real Estate Returns: 1987–2002

A stylized fact in the real estate diversification literature is that sector (property type) effects are relatively more important than regional (geographical) factors in determining property returns. Thus, for those portfolio managers who follow a top‐down approach to portfolio management, they should first choose which sectors to invest in and then select the best properties in each market. However, the question arises as to whether the dominance of sector effects over regional effects is constant. If not, property fund managers will need to take account of regional effects in developing their portfolio strategy. Using monthly returns data for individual properties over the period 1987:1 to 2002:12, this paper investigates the influence of sector and regional factors on commercial real estate performance, first by adopting the dummy variable approach of Heston and Rouwenhorst (1994, 1995) and then by using the notion of cross‐sectional dispersion introduced by Solnik and Roulet (2000). The results show that sector‐specific dominate region‐specific factors for the majority of the time and, in particular, during volatile periods of the real estate cycle. However, during calmer periods, sector and regional effects appear to be of equal importance. Overall, sector effects are still the most important aspect in the development of an active portfolio strategy.

Individual Assets, Market Structure And The Drivers Of Return

Much UK research and market practice on portfolio strategy and performance benchmarking relies on a sector‐geography subdivision of properties. Prior tests of the appropriateness of such divisions have generally relied on aggregated or hypothetical return data. However, the results found in aggregate may not hold when individual buildings are considered. This paper makes use of a dataset of individual UK property returns. A series of multivariate exploratory statistical techniques are utilised to test whether the return behaviour of individual properties conforms to their a priori grouping. The results suggest strongly that neither standard sector nor regional classifications provide a clear demarcation of individual building performance. This has important implications for both portfolio strategy and performance measurement and benchmarking. However, there do appear to be size and yield effects that help explain return behaviour at the property level. 1. All individual property data was processed by IPD to protect investor confidentiality.

Who gets the jobs? Factors influencing the employability of property and construction graduates in the UK

Against a background of a strongly performing property market, the last decade saw a significant rise in numbers of entrants to undergraduate and postgraduate built environment programmes in the UK. The growth in postgraduate numbers reflected the emergence of conversion programmes with the result that, across a range of built environment pathways, employers can choose between different types of graduate: those straight from an undergraduate degree, those who have completed an additional postgraduate course or those who have taken, following a first degree in another discipline, a conversion programme in property or construction at postgraduate level. A bivariate probit modelling approach is used to explore whether having a postgraduate taught (PGT) qualification systematically improves the probability of finding graduate level employment. Different built environment programmes are considered, while controlling for other factors that may influence employment outcomes, including university type, mode of study, gender, ethnicity and age. The results suggest that a postgraduate degree in land and property management significantly increases the probability of gaining graduate level employment, but this is not so for construction, quantity surveying or building surveying. The findings are discussed in the wider context of changes in UK higher education.

Sale and leaseback, asset outsourcing and capital market impacts

Structured sale and leasebacks and corporate property asset outsourcing are often claimed to have benefits that seem to be inconsistent with financial theory. Eight such UK deals are analysed to investigate the impact on corporate value. The results show that impacts are contingent ‐ on the capital structure of the firm, on the use of the capital raised and on market attitudes towards management and the sector. Two apparently similar deals can have quite different outcomes: benefits to shareholders and bondholders cannot be simply assumed.

Serial persistence in individual real estate returns in the UK

Purpose - The purpose of this paper is to examine individual level property returns to see whether there is evidence of persistence in performance, i.e. a greater than expected probability of well (badly) performing properties continuing to perform well (badly) in subsequent periods. Design/methodology/approach - The same methodology originally used in Young and Graff is applied, making the results directly comparable with those for the US and Australian markets. However, it uses a much larger database covering all UK commercial property data available in the Investment Property Databank (IPD) for the years 1981 to 2002 – as many as 216,758 individual property returns. Findings - While the results of this study mimic the US and Australian results of greater persistence in the extreme first and fourth quartiles, they also evidence persistence in the moderate second and third quartiles, a notable departure from previous studies. Likewise patterns across property type, location, time, and holding period are remarkably similar. Research limitations/implications - The findings suggest that performance persistence is not a feature unique to particular markets, but instead may characterize most advanced real estate investment markets. Originality/value - As well as extending previous research geographically, the paper explores possible reasons for such persistence, consideration of which leads to the conjecture that behaviors in the practice of institutional-grade commercial real estate investment management may themselves be deeply rooted and persistent, and perhaps influenced for good or ill by agency effects.