Tony McGough

An econometric analysis and forecasts of the office rental cycle in the Dublin area

This paper presents an econometric investigation of office rent determination in Dublin, a small European market, over the twenty eight year period 1970-1997. Using a single equation specification based on demand and supply interactions, changes in real GDP lagged one period and changes in the office stock lagged three periods were found to be the most important determinants of changes in real rents in this market. When the forecasting adequacy of the estimated model was tested and compared with forecasts derived from commonly used alternative statistical methodologies, the forecasts based on the estimated model outperformed the alternatives.

Forecasting commercial rental values using ARIMA models

The application of short‐term forecasting techniques to the prediction of commercial rental values generates valuable information about the dynamics of rent movements. It also captures short‐run trends more effectively than do other forecasting procedures. Makes use of ARIMA models to provide one‐step‐ahead predictions. The results show that ARIMA models perform better in the case of retail and office sectors. The forecasts for these sectors are satisfactory. Retail rents bear a relationship to their past values, whereas office rents are influenced by shocks in the market – demand or supply driven. The results of the present study are useful for incorporation in more general models of rent forecasting. Also presents a full methodology which facilitates its application.

National economic trends, market size and city growth effects on European office rents

This paper extends existing research on European office markets. Using a time-series cross-sectional methodology it examines the influence on office rents in 22 European cities of national economic conditions, market size and measures of economic growth and change in the city economy over the period 1982-94. The results demonstrate the significance of national real GDP changes and real interest rates in explaining European real office rental movements. In contrast, market size and city growth effects appear to have an insignificant impact on office rents.

Property cycles in the UK: an empirical investigation of the stylized facts

Applies the methodology adopted in contemporary business cycle research on establishing the stylized facts of aggregate output fluctuations, in the context of the office, industrial and retail building cycle. The objective of the study is to identify the degree to which cyclical regularities, which are in conformity with theoretical modelling, are identified across property sectors. Undertakes a statistical analysis of the cyclical properties of certain variables in relation to the building cycle in the respective commercial property sectors. The variables considered capture real economic conditions and trends in both the property and investment markets. The findings illustrate that certain variables display a cyclical pattern in relation to the property cycles which is in accordance with theoretical intuition. They also show that either other variables do not display any cyclical relationship to the commercial building cycles or the relationship does not conform to the predictions of the existing theoret...

Testing for bubbles in indirect property price cycles

Speculative bubbles are generated when investors include the expectation of the future price in their information set. Under these conditions, the actual market price of the security, that is set according to demand and supply, will be a function of the future price and vice versa. In the presence of speculative bubbles, positive expected bubble returns will lead to increased demand and will thus force prices to diverge from their fundamental value. This paper investigates whether the prices of UK equity-traded property stocks over the past 15 years contain evidence of a speculative bubble. The analysis draws upon the methodologies adopted in various studies examining price bubbles in the general stock market. Fundamental values are generated using two models: the dividend discount and the Gordon growth. Variance bounds tests are then applied to test for bubbles in the UK property asset prices. Finally, cointegration analysis is conducted to provide further evidence on the presence of bubbles. Evidence of the existence of bubbles is found, although these appear to be transitory and concentrated in the mid-to-late 1990s.

An empirical investigation of retail rents in five European cities

Presents the findings of the first comparative econometric investigation into the influence of demand side forces on retail rent determination in European cities. Examines five major retail centres ‐ Amsterdam, Brussels, Hamburg, London and Paris ‐ over the period 1980 to 1994. Estimates for each city a theory consistent model which tests influences of GDP, retail sales and consumer expenditure on changes in retail rents. Univariate and multivariate regressions show that the relative explanatory capabilities of these influences exhibit a notable degree of variation between the cities. A time series cross‐sectional analysis demonstrates that contemporaneous changes in GDP are the most important common determinant of retail rents across the cities and that the process of rent determination in Paris is influenced by different structural factors from the other cities examined.

The Impact of Planning on Local Business Rents

Despite the pervasiveness of planning intervention in the land and property market, the economic effects of the planning system have been little researched. While there is a growing body of work addressing this issue in the housing sector, similar work considering the business sector is marked only by its absence. The paper describes the first substantive attempt to explore this subject area through an analysis of the impact of planning on business rents. A full structural model of a local property market was developed. It incorporates the planning regime as a key element of the system and it allows for the interaction between property market use sectors. The model formed the basis for the creation of a simplified five-equation system that could be operationalised within extant data constraints. Upon application, a local effect of planning was identified that was consistent with theory. As planning regimes become tighter, the local supply of space decreases. This has a negative effect on local economic activity and a positive effect on local rents. However, the results must be much qualified. The study was affected by various limitations relating to data, to the geography upon which the model was based and to its cross-sectional character. Nevertheless, the work makes a contribution to the development of a theoretically robust model for analysing and estimating the effect of planning on the property sector of the local economy.

The predictability of office property returns in Helsinki

The aim of this paper is to forecast the office property returns in Helsinki CBD using both short‐run and long‐run econometric specifications. Real economy, monetary and financial market indicators are included in these specifications to explain the variation in office property returns and forecast them. The paper illustrates the steps that analysts can follow to select models based on common diagnostics criteria and ex post forecasting evaluation tests. The findings of this research are in accordance with the results of previous comparative research in Europe and suggest that the growth of the gross domestic product in Finland is a key variable for modelling and forecasting office property returns in Helsinki. Moreover, the analysis indicated that information from a long‐run relationship of the gross domestic product and the real office return index should be monitored in the future as a way of improving the forecasts through an error correction model. It is predicted that Helsinki office returns will show a growth of about 7.1 per cent on average in the period 1999‐2001.

Rational Expectations, Uncertainty and Cyclical Activity in the British Office Market:

This study presents an econometric investigation of office building development in Great Britain. The results show that the cyclical activity in office development, measured by the changes in the office building output series compiled by the Department of the Environment, is explained by the changes in Hillier Parker real office rents, and changes in the volume of output in services. There is also strong evidence that uncertainty, originating in the volatility of rents, exerted a negative influence on the rate of office development in the 1990s. The study advances further the existing econometric treatment of office building development by undertaking direct tests of rationality and shows that the estimated model produces forecasts which are characterised by rational expectations. It is established that information contained in the past history of office building output and variables which are considered to explain its cyclical pattern is efficiently and consistently incorporated. The model also suggests that in the formation of one-period forecasts the weight attached to the error most recently observed is about 30 per cent.

Affordability and performance in the industrial property market

Purpose – The aim of the present study is to assess the significance of cash flow and profitability survey data in the modelling and forecasting of industrial rents. These data, taken from the British Chambers of Commerce regional surveys of the manufacturing sector, are used as a partial proxy for the affordability of industrial space occupiers. In the absence of direct profitability measures existing studies approximate this information indirectly through output and to some extent employment variables.Design/methodology/approach – A cross‐section time‐series framework is deployed to model regional industrial rents using a set of output and employment variables. The empirical model is subsequently augmented with the inclusion of the cash flow and profitability measures.Findings – Consistent with the findings of existing studies, changes in output are a significant influence on the variation of real industrial rents. Supportive evidence for turnover and profitability is found in four regions. In these reg...