Rental Growth Research Articles

Shop rental growth assessments

This paper outlines the author's contention that investors, valuers and others are placing undue reliance on certain retail market data. It examines aspects of a practical difficulty that arise in consequence — the business of implicitly or explicitly assessing rental growth rates for individual retail properties.

Retail warehouse performance

Strong retail warehouse rental growth and investment return performance has been evident for much of the last decade. Currently, retail warehouse rental growth is higher than for any other sector and retail warehouse net investment is exceptionally strong. This paper examines the underlying causes of such strong performance both in terms of demand and supply. It looks at forecasts for key economic demand variables over the next few years and how that will affect rental growth and investment returns. This paper is an edited and updated version of a paper given at a Henry Stewart Conference in March 2003, ‘Maintaining and Increasing Values in Out of Town Retail’.

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 naïve methods and a composite indicator. The results show the naïve 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.

Portfolio Implications of Apartment Investing

This study examines the portfolio implications of apartment investing. In particular, it concentrates on the sector's relative stability, liquidity and current market outlook. Support is found for many of the advantages attributed to apartments relative to other property types. The apartment sector has historically offered high risk-adjusted returns and a relatively low correlation with other property sectors. These features, combined with the attractive demographics and stable space market fundamentals, suggest that the current environment should be favorable for apartment investing. However, the popularity of the sector, aggressive rent growth assumptions and potential limitations on future immigration provide sources of performance risk.

Rent stabilization and the long-run supply of housing

This paper examines the impact of moderate rent controls on the construction and replacement of urban housing. It studies a common form of rent regulation that limits rent growth to below-market increases but permits landlords to set the base rent at free market levels and allows them to re-set rents when the incumbent tenant vacates, after which rents are re-controlled (‘vacancy decontrol–recontrol’). One of the primary insights is that neither the timing nor the density of construction is affected by rent stabilization when base rents are perfectly flexible. Allowing landlords to set the initial contract rent lets them capture the benefits to the renter of rent stabilization. Perfect capitalization of rent stabilization into a higher base rent provides the landlord with a free market rate of return and thus does not distort development activity. However, redevelopment of land will be hastened because rent stabilization complemented by vacancy decontrol–recontrol increases the difference between rents before and after redevelopment, increasing the opportunity costs of postponing redevelopment. Extensions include an analysis of other common rent regulations and the impact of rent stabilization on the urban rent gradient.

Classifying Local Retail Property Markets on the Basis of Rental Growth Rates

Diversification strategies for the property element of portfolios have traditionally been undertaken on a sectoral/regional basis, primarily due to data restrictions. However, the standard regions in the UK are defined for administrative purposes and are likely, therefore, to be composed of heterogeneous property markets. The development of an alternative classification, based on local property markets, is investigated. This is based on annual retail rental growth rates and is developed using cluster analysis. A number of issues emerge. Throughout the various stages of development and tests for temporal stability, the local markets group according to broad underlying rental drivers. However, more tightly defined clusters are unstable over time as a consequence of rental volatility at the local level. It is clear that markets do not form groups conforming to the geographical regions that are widely analysed and that traditionally form the basis for diversification.

Valuing renewal options in public industrial leases in Singapore

Option to review land rents to prevailing market rents and option to renew leases for another term are two important options embedded in the public industrial land leases in Singapore, managed by the Jurong Town Corporation (JTC). The land rents of JTC leases are reviewed every year subject to a cap on the land rent increase. The rent cap, which is historically lower than the prevailing market growth rate, widens the gap between the contract rent and the prevailing market rent as the lease progresses. This creates disincentives to the lessor for not exercising the rent review option, because the option is in‐the‐money. The rent gap, on the other hand, is also translated into substantial profit rents for lessees who hold onto the leasehold interests of industrial lands. By assuming two different probability distributions for the ex‐ante prevailing market rents, the profit rents were simulated to derive at the values of a hypothetical 30‐year lease, which range from US$47.93 (S$86.45) per square meter (psm) (Sungei Kadut, Kranji) to US$236.05 (S$425.74) psm (West Coast Highway). Based on these simulated 30‐year leasehold values and assumptions of other input parameters: equated yield (e = 10 percent), risk free rate (Rf = 4.52), volatility of leasehold value (σ = 15 percent), term of lease (T = 30 years) and rental growth cap (g = 7.6 percent), the premiums for the lease renewal options were estimated to be in a range of US$4.55 (S$8.21) psm to US$22.26 (S$40.15) psm.

The Property Tax as a Tax on Value: Deadweight Loss

Consider an atomistic developer who decides when and at what density to develop his land, under a property value tax system characterized by three time-invariant tax rates: τ V , the tax rate on pre-development land value; τ S , the tax rate on post-development residual site value; and τ K , the tax rate on structure value. Arnott (2005) identified the subset of property value tax systems that are neutral. This paper investigates the relative efficiency of four idealized, non-neutral property value tax systems [(i) “Canadian'' property tax system: τ V = 0, τ S = τ K ; (ii) simple property tax system: τ V = τ S = τ K ; (iii) residual site value tax system: τ K = 0,τ V = τ S ; (iv) two-rate property tax system: τ V = τ S > τ K > 0] under the assumption of a constant rental growth rate.

Leisure property trends: What is driving occupier demand?

Continuing shifts in the structure and direction of leisure operator markets are causing considerable turbulence in the occupational demand for leisure property. It is argued here that ‘leisure’ is not one easy-to-read sector but comprises several specialised markets. The situation is made even more difficult for property investors by the constantly changing corporate landscape in leisure, as operators juggle their portfolios in order to meet City expectations for larger and more focused companies. Equally, though, the fast-moving, fashion-driven nature of leisure continues to create demand for new space and formats. The paper reviews current trends in key occupier markets and discusses emerging evidence on leisure rental growth in the light of these trends.

Rent Stabilization and the Long-Run Supply of Housing

This study contributes to the understanding of how the construction and replacement of urban housing may be affected by rent stabilization. One of the primary insights is that neither the timing nor the density of development will be affected by rent stabilization because allowing perfectly flexible base rents permits landlords to capture all of the advantages of a rent growth control. However, redevelopment is hastened because rent stabilization complemented by vacancy decontrol increases the difference between rents before and after redevelopment, increasing the opportunity costs of postponing redevelopment. Extensions include an analysis of other common rent regulations and the impact of rent stabilization on the urban rent gradient.

From crinkly sheds to fashion parks: the role of financial investment in the transformation of retail parks

The retail park is one of the most ubiquitous and significant forms of off-centre retailing in the UK. Originally designed as low-cost accommodation for 'bulky goods', retail parks now include high-rent 'fashion parks' which are eagerly sought by institutional investors for long-term ownership. This paper explains why retail-park ownership, originating in the early 1980s in one-off schemes by locally based property developers, has become the province of major property companies, financial institutions, and asset managers. Growth in rents and capital values has been fuelled by increasing institutional investment, and by fears of a growing scarcity of high-quality developments because of town-planning restrictions. This pressure is now leading to attempts to realize the full capital value of older developments, through processes of 'active management' by the new breed of retail-park owners. In turn, this is leading to increasingly rapid changes of retail occupiers, involving in some cases the expulsion of the original 'bulky goods' retailers for whom retail parks were created. A parallel with the 'Wheel of Retailing' model of institutional change is suggested.

Property Investment Appraisal

ABSTRACTThis paper considers the application of discounted cash flow (DCF) techniques to the analysis of the property investment market. The traditional method of property valuation is briefly outlined and its shortcomings highlighted. An alternative DCF procedure is derived to calculate the present value of a property investment. This method will be familiar to actuaries, but is not always used in property disciplines. The sensitivities of this formulation to changes in the force of real interest, force of real rental growth and force of inflation are derived. It is suggested how these formulae may be used for property investment appraisal and risk analysis. We conclude that DCF offers a more flexible and accurate means of estimating the value of a property, and that property valuers, financial economists and actuaries should work jointly to develop practical DCF methods. However, so long as traditional methods of valuation prevail, a rational investor must use both methods to identify mispriced property assets. There have been few property contributions to the actuarial literature in the United Kingdom; this paper is intended to build on the few previous papers and suggests directions for future work.

The Nominal Rigidity of Apartment Rents

This paper contributes to the empirical literature on price stickiness by documenting a high rate of nominal rigidity among housing rents in the United States between 1974 and 1981. Of the units studied, 29% had no change in nominal rents from year to year. The incidence was much higher (a) in years and cities with a low median nominal rent growth rate, and among (b) units whose tenants continued from the previous year and (c) units in small buildings. A little less than half of the nominal rigidity can be ascribed to grid pricing. Possible explanations, as well as the likely distributive and allocative implications, are discussed.

Lag vacancy, effective rents and optimal lease term

This paper analyses the choice of the optimal lease term of office property in relation to expected lag vacancy, periods of rent‐free and expected rental income growth. The optimal lease term is the one that minimizes the expected costs of contract negotiation from the perspective of landlords. Specifically, it presents an analysis of how to estimate effective rents based on the lease term, expected lag vacancy and rent‐free periods. This study shows that the optimal lease term tends to increase under the following conditions: when the expected rate of rental growth decreases, the discount rate increases, or the expected lag vacancy increases. A longer contract duration is less costly when future rentals are discounted at a higher rate. Altering the lease length will change the risks taken by the landlord. Thus, contract length can be used as a device for insuring vacancy risk. Moreover, we find that the optimal lease length is more sensitive to the lag vacancy when the discount rate is at a relatively high level.

L'hypothèse de bulle immobilière

The boom of prices and quantities in the real estate markets followed by their fall in most industrialised countries is often considered as a bubble. This paper shows that there wasn't any bubble, i.e., a purely speculative phenomenon without any real factor at the origin, but a cycle due to a shock. The shock is the drop of interest rates and inflation. This shock leads the landlords to reallocate their assets towards financial invest-ments. The contraction of the rental housing stock is responsible for the growth of rents and priees consequently. Conversely, the buyers of housing for owner-occupancy, who are under a liquidity constraint, mind the nominal amount of annuity compared to their income and have been led to buy. These mechanisms are tested on the Parisian residential real estate market. JEL Codes : E32, G12, R31

Real Estate Rental Growth Rates at Different Points in the Physical Market Cycle

Real estate markets go through both physical cycles (demand and supply) that affect rental growth rates and financial cycles (capital flows to real estate) that affect property Prices (Mueller, 1995). This study develops a rental growth rate hypothesis based on a market’s position in the physical (demand-supply) market cycle. Using data from fifty-four office and industrial markets in the United States over a thirty-year period, an aggregated national average rental growth rate was calculated for each point in the cycle. An ANOVA test for differences of means found that the national average rental growth rates at each point in the cycle were statistically different. The results show local demand and supply, which interact to affect occupancy, are major determinants in rental growth rates. This research should help investors move from using a single rental growth rate for multiple year forecasts, to using yearly cycle driven rental growth rate estimates in their discounted cash flow projections.

International Real Estate Review

This study aims to analyze the performance of industrial rents and land values in the Sydney property market. In the Sydney industrial property market, no growth of the rents and marginal growth of the land values in real terms has been seen between 1976 to 1996. It means that the overall return from an investment in industrial property is achieved largely from initial yield and current rental incomes, rather than rental growth and capital appreciation. The trends of real growth of industrial rents and land values have a similar cycle, but different magnitude (a or s) of fluctuation. It is concluded that industrial rent is determined more by demand than supply side factors, while land value is determined more by supply side factors than demand side factors.

REIT Size and Earnings Growth: Is Bigger Better, or a New Challenge?

Executive Summary. 1995, 1996 and 1997 were explosive growth years for real estate investment trusts (REITs) to acquire properties and grow as large as possible, as quickly as possible. Property acquisitions were the easiest way to increase a REIT's total earnings; however the growth in earnings per share is the key to long-term stock price increases and this becomes more difficult as a REIT grows in size. Larger total size eventually causes the FFO per-share growth rate to decline, as additional acquisitions are such a small percentage of overall company earnings, and the additional shares that must be issued to acquire more properties makes per-share FFO growth more difficult. While prices seemed to be driven by size growth these last few years, in the long run, REIT prices should be driven by FFO per-share growth because the stock market's dividend discount model applies to REITs as well as all other stocks.The REIT growth race that began in 1992 has created a new mega-cap REIT group in 1998. These mega-cap REITs appear to be going through a “metamorphosis” where they will either, become an index proxy for the rental growth of their private real estate sectors or, start becoming operating companies with different characteristics and risks. This research questions whether Bigger total size is really Better as the earnings per-share growth rate slows down as the number of outstanding equity shares increases—a mega-cap REIT problem evidenced by a dramatic price decline in the first half of 1988. Only the future will tell whether the mega REITs can sustain earnings per-share growth. Some possible alternatives are to sell properties that do not have growth potential and reinvest in higher growth investments or that some of today's mega-cap REITs may be forced to break up into smaller regionally focused REITs to regain profitable growth, just like the 1980 conglomerates that are now spinning off highly focused and specialized companies to maximize shareholder value. At the other end of the size spectrum, small-cap REITs under $500 million have been just as profitable as the large-cap REITs in the past five years, because they can grow more profitably from a small base.

Issues in the development and application of property market forecasting: the investor’s perspective

Forecasts of rental growth are increasingly being required by and provided to property investors by a growing number of suppliers. Reviews the uses to which such forecasts are put by a major Uk institutional investor and, from a relatively unique vantage point, critically reviews the forecasting services available in the marketplace. In doing so, it identifies the main forecasting approaches adopted, highlights some of the clear inconsistencies between forecasters in terms of what they are forecasting, how they are forecasting and the different data sources they are using. Explains some of the causes for substantial variations observed in the forecasts provided and, finally, explores the potential for systematic forecasting errors. Concludes by emphasizing the need to switch attention from technical methods to improved “view formation”.

Real estate and a single currency

Currency fluctuations have a significant impact on occupational and investment property markets. The performance of an international portfolio would be strongly influenced by the changes seen in the exchange rate of the investor and in the country of their investments. Occupational costs meanwhile vary considerably as a function of currency movements as well as rental growth. A single currency would reduce this risk. The changing economic conditions necessary to deliver a single currency are however of greater importance than the denomination of money. Examines the general concept of a single currency, rather than the specific design and implementation of the Euro as currently envisaged. There are clearly some concerns as to the stability of the proposed new European currency. If extreme, these could outweigh the advantages indicated in this research, particularly over the shorter term. Modelling capital growth and yields demonstrates the importance of exchange rates as a function of monetary policy and economic behaviour. A single currency could allow yield premiums to fall in more volatile markets as economic conditions converge, as has already been seen in bond markets. It would highlight the pricing of property as a function of fundamental demand and income security and could facilitate a more sophisticated valuation and investment appraisal practice in Europe. If EMU goes ahead it will lead to new occupational patterns and areas of investment growth. As such it is likely to generate tenant and investor activity as the most efficient and competitive locations are sought out.