UK Commercial Property Market Research Articles

UK commercial real estate valuation practice: does it now build in sustainability considerations?

PurposeThis paper investigates the extent to which commercial property valuers in the UK refer to Royal Institution of Chartered Surveyors (RICS) professional standards and guidance on the inclusion of sustainability in valuation reports. Data collection, analysis and reporting related to sustainability attributes is examined, as well as the perceived importance of these attributes to clients and any value impacts that are associated with them.Design/methodology/approachAn online survey of UK commercial property valuers was conducted from July to September 2019. The survey included both structured and open-ended questions.FindingsReference to RICS standards and guidance on sustainability has improved since earlier research. However, progress on data collection is still limited. At the time of the survey, UK valuers indicated that sustainability attributes were of more importance to owner-occupiers than investors and lenders. UK valuers also indicated that, out of a range of sustainability attributes, only certification was influencing market value (MV) and investment value (IV) to any great extent.Research limitations/implicationsThe online survey had 53 responses and this limited the ability to draw definitive conclusions. Hence, whilst the results may be indicative of the perceptions of some valuers of the significance of sustainability-related matters in the UK, the sample is not large enough to be considered representative of the opinions of property valuers per se in the UK.Practical implicationsExplicit reflection of sustainability in market or investment values is still limited in the UK valuation practice, but there are challenges faced by valuers that need further investigation, including difficulties in pricing sustainability attributes.Originality/valueThis is the first empirical investigation of the perception of sustainability by valuers in the UK commercial property market since the 2012 survey reported by Michl et al. (2016).

Using system dynamics modelling to understand behaviour in UK commercial property markets

PurposeThe purpose of this paper is to outline the benefits of using system dynamics modelling as a research tool to understand the dynamics of commercial property markets in the UK and their long-term behaviour. It highlights areas for future work.Design/methodology/approachThis is a concept paper that outlines a simple systems model of rental change in UK commercial property markets as a way of illustrating how a systems approach can be used to describe and model the market. The model concentrates on the user market and offers a view of market operation, according to which development activity is initiated by demand (linked to economic growth) and to which supply responds by producing development.FindingsThe model demonstrates how a systems approach can be used to model the impact of a wide range of market variables on rental growth. The approach allows non-linear modelling of the complex relationships and behavioural factors that are difficult to include in existing econometric models of the market. It highlights where existing knowledge is deficient, especially with regard to price elasticity of demand, the relationship between economic activity and take up, the potential impact of redevelopment on the supply of new property and rental growth and response times of various parts of the market development process to market signals. It outlines where further research is needed to incorporate real market data.Originality/valueDespite the wide application of the systems theory to business and other related areas, its use in commercial property research has been limited and has not gained much traction as a research tool. The work represents one of a very few studies applying the systems theory to the UK commercial property market.

How long is UK property cycle?

PurposeThe purpose of this paper is to assess the duration of the UK commercial property cycles, their volatility and persistence to gauge future market direction.Design/methodology/approachThe study employs a novel approach to dissect cycles in a form of a three-step algorithm. First, the Hodrick-Prescott de-trends the selected variables. Second, volatility (measured by the variance) screens periods of atypical fluctuations in the series. Finally, the series is regressed against its past values to assess the level of persistence. The sequential steps screen the length of the cycles in UK commercial property market to facilitate interpretation.FindingsThe estimates suggest that UK commercial property market follows an eight-year cycle. Combined modelling results indicate that the current market trend is likely to change over the coming year. The modelling suggests increasing probability of a market correction in late 2016/early 2017.Practical implicationsThis updated appreciation of the UK commercial property cycle duration allows for better market timing and investment decision making.Originality/valueThe paper adds additional evidence on the contested issue of UK commercial property cycle duration.

Forward–futures price differences in the UK commercial property market: Arbitrage and marking-to-model explanations

In this paper the differences between forward and futures prices for the UK commercial property market are analyzed, using both time series and panel data. A first battery of tests establishes that the observed differences are statistically significant over the study period. Further analysis considers the modeling of this difference using mean-reverting models. The proposed models are then estimated with a number of alternative estimation methods and second stage statistical tests are implemented in order to decide which model and estimation method best represent the data.

Is Instrinsic Energy Efficiency Reflected in the Pricing of UK Office Leases?

The aim of this research is to investigate whether the intrinsic energy efficiency rating of an office building has a significant impact on its rental value. Using a sample of 817 office buildings with Energy Performance Certificate (EPCs), we investigate whether a pricing differential can be identified depending on the energy rating. While previous analyses of this topic have typically relied on appraisal-based and/or asking rent data, our dataset contains actual contract rents as well as information on lease terms. The results indicate a significant rental premium for energy efficient buildings. However, we find that this premium appears to be mainly driven by the youngest cohort of state-of-the-art energy efficient buildings. We also find that tenants of more energy efficient buildings tend to pay a lower service charge but this link appears to be rather weak and limited to newer buildings. Hence, we argue that the information contained in the EPC is still not fully taken into account in the UK commercial property market with the possible exception of both the highest and the lowest EPC ratings.

The risk free rate of return in UK property pricing

PurposeThe aim of this paper is to consider the appropriate benchmark risk free rate sui for pricing of property investments in the UK and, in doing so, investigate the financial characteristics and performance of the UK gilt yields. European investors have been significant players in the UK commercial property market during the last decade and in order to be competitive in bidding situations with UK‐based investors, require to be aware of the pricing criteria adopted.Design/methodology/approachThis paper analyses the stability, yield distribution and volatility of both conventional gilts and index‐linked gilts with different maturities over the period 1980‐2010. It considers the changing structure of the UK commercial property market and reports on a questionnaire survey of the UK property investment community, which focused on the rationale behind the selection of the appropriate risk free rate of return.FindingsThe analysis suggests that ten‐year index‐linked gilts have been the most stable, but that if conventional gilts are preferred, then five‐year nominal appear to be more stable than ten‐year nominal; ten‐year real yields are smoother and relatively less volatile. In the authors' survey of the UK property investment fund managers and their advisors, the majority, but by no means all of the respondents, used the ten‐year nominal gilt yield as their risk free rate of return. However, questions were raised as to whether it was appropriate to use spot or average gilt yields, particularly when rates in 2009/2010 had fallen to such low level.Originality/valueThe findings provide a better understanding of how the different maturities of gilts behave. Insight is given on the criteria adopted by investors when selecting the risk free rate.

Measuring the financial performance of green buildings in the UK commercial property market

PurposeGiven the centrality of data and information to the evaluation and operation of policies to reduce carbon emissions, the purpose of this paper is to investigate potential sources of data within in the UK on the commercial building stock in terms of its physical characteristics, financial performance, energy consumption and environmental performance. The research aimed to increase understanding of the potential sources of data on property attributes, financial performance and energy use or environmental performance, with a particular emphasis on evaluating their strengths and weaknesses in terms of scope, quality, availability and practicability.Design/methodology/approachThis is an explorative, qualitative study that uses semi‐structured interviews conducted with 11 different data holding organisations.FindingsWhilst public sector organisations have the potential to provide the data required for large samples, there are major barriers to obtaining and linking the different databases. Data on the three key data elements (prices, attributes and environmental performance) tend to be split between different governmental agencies. There are likely to be substantial problems (and costs) of linking the databases due, in particular, to definitional differences. There is a conflict between government's public good objective of increasing knowledge of the environmental performance of buildings and its objective of maximising revenues from the commercial exploitation of data. Since the private sector organisations that hold data are commercially motivated, the samples that they have gathered are largely client driven and, consequently, tend to be partial, particular, proprietary, private and product‐related.Originality/valueSince pricing studies are central to evaluating the effectiveness of eco‐labelling in property markets, this paper improves one's understanding of the role of information and data barriers to improving the allocative efficiency of commercial property markets.

Social Production of Desirable Space: An Exploration of the Practice and Role of Property Agents in the UK Commercial Property Market

The design, construction, and occupation of a sustainable built environment have been the focus of much research over recent years. Most notably, the focus has been on the modelling and prediction of energy use and carbon production during the design process together with the monitoring of carbon emissions during occupation. A second focus has highlighted the influence of occupant behaviour on carbon emissions. However, this overlooks the complex social interactions which together produce the built environment. There is room for seeking to unpack the social production of (un)sustainable buildings from design through construction to commissioning. These buildings significantly set the agenda for the behaviour of occupants whatever their level of carbon consciousness. In this paper we use the practices and role of property agents in the commercial property market as a window on the social production of (un)sustainable buildings.

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 Forum's 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.

Irish investment in UK commercial property

AbstractThis paper explores the trend of Irish investment in the UK commercial property market, which has been particularly prevalent in recent years. It discusses the quantum of Irish investment spend (private and institutional) in the UK commercial property market over recent years, outlining the reasons why Irish investors typically choose to invest in the UK property market as opposed to their domestic market. Sectors and locations which are particularly appealing to the Irish investors in the UK are explored and examples of some recent deals are outlined. The paper goes on to discuss the rationale for funding Irish investment purchases in the UK, outlining in particular the factors which an Irish lending institution will typically take into account when lending on UK commercial property purchases. Copyright © 2004 Henry Stewart Publications

Investment valuation models

It is well recognised that the UK commercial property market has traditionally used nominal market benchmarks such as the all‐risk yield based on the assumption that rents are received annually in arrears. Obviously, the reality of the market is that rents are invariably received quarterly in advance and it has been suggested that valuers should move towards valuation techniques that reflect the actual timing of the cash flow. The Investment Property Forum issued a paper in September 1999 promulgating the use of quarterly in advance valuations. Parry’s Tables provides quarterly in advance formulae that reflect the reality of rental income and indicates that an annual effective yield should be used instead of a nominal yield to compensate for the subsequent compounding resulting from an income received quarterly. However, as will be shown, the effective yield formula provided by Parry’s does not reflect quarterly payments that are received in advance so compromising the accurate transition from annually in arrears to quarterly in advance formulae based valuations. Tables produced by the IPF have rectified this problem in part as they correctly work on the premise that capital values will not change as the profession changes to a quarterly approach. It is the yield which will be expressed differently. The use of an all risk yield technique for valuation is actually a comparative method. The way in which the yield is expressed is not the critical issue, it is the multiplier against the rent which will determine value. This paper provides the formula required to accurately transfer annually in arrears data into quarterly in advance data together with the formulae required for contemporary growth explicit discounted cash flows (DCF).

An attribution of the return on the UK commercial property market

Between 1981 and 1994, the UK commercial property market (IPD) delivered a total return of 9.9 per cent each year, 4.2 per cent each year in real terms. Over the same period, the real return on UK equities and UK gilts was 11.6 per cent and 6.9 per cent respectively, it is important to account for the poor performance of property. Other than a model which attributes performance to income return and capital return, there are few models that attempt to account for this. This model is simply descriptive. The responsiveness of the return on commercial property to inflation is crucial to pension funds, the liabilities of which are often wage‐linked. Establishes auto‐regressive expectations of real ERV growth and inflation. Presents a model of the simulated lease structure of the IPD. States the main cause of the under‐performance was the increase in the required return on property over the period. Between 1980 and 1994, long‐term expectations of inflation fell. Concludes by stating the existence of over‐rented properties, after the decline in rents in the early 1990s, had a large impact on he relative influence of inflation and real ERV growth. Over‐renting increases the impact of unexpected inflation and changes in expected inflation and reduces the impact of unexpected real ERV growth and changes in expected real ERV growth. In fact, the impact of unexpected inflation in an over‐rented environment is bigger than the impact of unexpected real ERV growth.

BT PropNet — a commercial property trading service for the Internet

The UK commercial property market has a large number of stakeholders which can hinder identification and analysis of key information. By using the latest Internet technology, this information can be made available to the desktop to significantly enhance the property trading business. This paper provides an overview of the recently launched BT PropNet, a trial property trading service for the UK commercial market, and describes its system infrastructure.

An analysis of valuation variation in the UK commercial property market

Addresses the issue of valuation variation. The fundamental research question is to establish the range of valuations which a group of qualified valuers operating in the same market and using the same basic assumptions would produce in their estimation of price. It significantly extends the approach adopted by Hager and Lord and draws conclusions about different market sectors, locations and size of firms. The results of the survey show a wide variation in value across both rack rented and reversionary interests. In terms of the former over 80 per cent of all valuations produced a variation from the mean of less than 20 per cent with a corresponding figure of over 90 per cent for the reversionary investments. These levels of accuracy fall short of the contention that valuers can value to within 5‐10 per cent of market value.

THE INFORMATION CONTENT OF PROPERTY VALUATIONS

Utilising a sample of 135 properties with continuous returns data calculated at monthly intervals over the period from January 1979 to December 1982 an analysis is undertaken to test the efficiency of the UK commercial property market. The results show that the market is efficient at the weak form level and that valuers are doing a good job in impounding information. Significant positive serial correlation does exist at the portfolio level but this is probably induced by averaging. The empirical evidence would seem to imply that the property market conforms to the requirements of a fair game so that investors can only expect to earn high returns by taking on high risk.