Explaining Rental Depreciation of United Kingdom Commercial Investment Properties: A Panel Regression Approach

Abstract

This paper extends work that was funded by the UK Investment Property Forum over the last 8 years and which used longitudinal methods to measure rental value depreciation rates for commercial properties in the IPD UK annual database.Past work has concentrated on measuring rates of depreciation and a succession of projects and papers has developed the methods of measurement and the data. A research team including Baum, Crosby, Devaney and Law (IPF, 2005) identified 10 and 19 year average rates of depreciation over a period expiring in 2003. They examined aggregate rates for the UK office, retail and industrial markets over 19 years, as well as rates for 10 IPD Portfolio Analysis Service segments for the period 1993 to 2003. Crosby and Devaney (IPF, 2011) then extended the 10 year data set to 2009 measuring rental value depreciation rates over 16 years for the same 10 IPD PAS segments.This paper uses panel regression methods to attempt to explain the depreciation rates found within the IPF (2011) study for individual office and industrial properties. Explanatory variables such as age, location, land values and building quality indicators are tested for significance using both fixed effects and between effects panel regressions that control for unobserved heterogeneity. Age, benchmark rental growth, capital expenditure and macro-economic controls appear to exert statistically significant feedback effects on the depreciation rate. These results are reasonably robust across several model specifications and samples.IPF (2005). Depreciation in Commercial Property Markets. Investment Property Forum / IPF Educational Trust. London.IPF (2011). Depreciation of commercial investment property in the UK. Investment Property Forum: London.