macroeconomics and property valuation. introduction real estate is a ‘factor of production’ and...

Macroeconomicsand property valuation

Introduction• Real estate is a ‘factor of production’ and a ‘basic social

requirement’• Demand for it is ‘derived’• Supply is affected by many externalities• Supply and demand drivers influence the value of real

estate

‘Derived’ demand sectors• Development• Occupation• Investment

Geography• International• Regional• City-regions• Towns and cities• In-town / out-of-town• Neighbourhoods• Streets

Uses

• Residential– Owner-occupied– Private rented– Affordable

• Industrial– Factories– Warehouses

• Standard• Distribution• Data

• Other– Leisure– Etc.

• Commercial– Retail

• Shopping centres• Standard units• Retail warehouses• Outlets • Department stores• supermarkets

– Offices• Business parks• blocks

Use Classes• A1 Shops• A2 Financial and professional services• A3 Restaurants and cafés• A4 Drinking establishments• A5 Hot food takeaways• B1 Business• B2 General industrial• B8 Storage or distribution• C1 Hotels• C2 Residential institutions• C3 Dwellinghouses • C4 Houses in multiple occupation• D1 Non-residential institutions• D2 Assembly and Sui Generis

• Prime• Secondary• Tertiary

Quality

Retail – city centre prime

- city centre prime mall

• Many types of shop• Investors seek ‘prime’ property• Secure due to ‘goodwill’ and

capital investment by tenant• New areas more risky - turnover

rent

• Many types of shop• Investors seek ‘prime’ property• Secure due to ‘goodwill’ and

capital investment by tenant• New areas more risky - turnover

rent

Retail – city tertiary

Retail – citycentresecondary

Retail – out of town prime mall

Offices – city centre prime…

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s-pr

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Business parks

Offices – out of town purpose built prime and out of town speculative prime / secondary

Industrials• Starter units

– 3 year leases– Capable of being used (under GPDO) and therefore fitted out as office

and/or industrial space

• Medium-sized units– Include office space– 5-10,000 ft2

• Large units– Typically don’t fit out ground floor– 30,000 ft2– 8m eaves– Flexible space

Change of use

From ToA2 (professional and financial services) when premises have a display window at ground level

A1 (shop)

A3 (restaurants and cafes) A1 or A2A4 (drinking establishments) A1 or A2 or A3A5 (hot food takeaways) A1 or A2 or A3B1 (business) (permission limited to change of use relating to not more than 235 square metres of floor space)

B8 (storage and distribution)

B2 (general industrial) B1 (business)B2 (general industrial) (permission limited to change of use relating to not more than 235 square metres of floor space)

B8 (storage and distribution)

B8 (storage and distribution) (permission limited to change of use relating to not more than 235 square metres of floor space)

B1 (business)

C4 (houses in multiple occupation) C3 (dwellinghouses)

Casinos (sui generis)D2 (assembly and

leisure)

Heavyindustrialmanufacturing

Lightindustrialtrading estate

Warehousing

trading estateO

ffice / w

arehouseout of tow

n

Warehousing, B8 space...

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Data centres

• Approx. 120,000 ft2• 25 year leases• 24 hour security• 10m eaves• Mezzanine• 30MVa (cf 300kVa)• 25% higher rent than industrial• Within 25 miles of London

Leisure:city centre andout of town complex

Residential

Key indicators: supply• New development• Number of (and level of employment in) construction and real estate firms• Availability of space

– Vacancy rate classified by land use– Expect a churn (natural vacancy) rate due to companies moving and lumpy

supply (higher in volatile, fast-growing market, lower in supply restricted market)

– Inversely correlated with rental value– If typical lease is 5 yrs then 20% firms looking to renew/relocate each year– Vacant floorspacet = vacant floorspacet-1 + new floorspacet – net absorption

Developerso Merchant developerso Investor developerso Owner occupiers

Developerso Merchant developerso Investor developerso Owner occupiers

Vacancy (shops)

29End of Year Report 2009: Dawn of a better market! 10th February 2010 Local Data Company

Key indicators: demand andmarket clearingOccupiers• Prices• Rents and lease terms

– Care over rent definitions: asking, headline, effective• Rate of change in rents and prices over timeInvestors• Prices (capital values)• YieldsAll• Number of transactions• Take-up / absorption (quantity of space taken per period)

– Gross absorption includes moves within market– Net absorption = net increase in occupied space– Expansion (majority usually local)– In-moves (look at differential between rent and vacancy rates in local, national,

international markets)

Occupierso Tenantso Owner occupiers

Occupierso Tenantso Owner occupiers

Investorso Institutionso Overseaso Private

Investorso Institutionso Overseaso Private

Development• Supply side variable• Supply pipeline (by sector and

graded according to quality)

• ONS Construction Statistics Annual– Value of construction output

classified by land use and location– Planning applications

• Redevelopment or refurbishment costs

– BCIS– Spon’s ‘Architects’ and Builders’

Price Book’

• Consider– Appropriate spatial scale– Probability of completion– Net addition to supply (i.e.

deduct demolitions and conversions)

– Refurbishments

Land market• Land prices – market clearing or equilibrium variable

– VOA Property Market Report: live link

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

North East NorthWest

Yorkshireand theHumber

EastMidlands

WestMidlands

East ofEngland

London SouthEast

SouthWest

Wales

Other bulk premisesWarehousesFactoriesOfficesRetail

000m2

NON-DOMESTIC - Stock

Total floorspace of commercial and industrial properties in England and Wales = 596m sqm

NON-DOMESTIC - Occupiers

Source: UK Business

Source: UK National Accounts (The Blue Book)

NON-DOMESTIC - Value

37

Around half of the non-domestic stock is owner-occupied, the other half owned by investors

Source: UK National Accounts (The Blue Book) 38

0

20

40

60

80

100

120

140

160

North East North West Yorkshireand theHumber

EastMidlands

WestMidlands

East ofEngland

London South East SouthWest

Wales

Rateable value per m2

(£)

England & Wales average

Retail premises have the highest rateable value (£128/m2) and factories the lowest (£29/m2)

40

NON-DOMESTIC - Value

Brokerage and transactions• CoStar (Focus)• EGi• IPD• Market reports

Lease events• BPF IPD Annual Lease Review• S&P IPD Lease Events Review

DOMESTIC: Residential (live tables)

• Stock • House building • Housing renewal (including Disabled Faci

lities Grants)

• Household estimates and projections • Housing market and house prices • Rents, lettings and tenancies • Homelessness • Household characteristics • Housing finance and household expendit

ure

• Social housing sales • Affordable housing supply • Repossession and repossession preventi

on

• Local level statistics

• Housing Surveys• Housing data index• Mortgage rates• Mortgage loan originations• First-time buyer LTVs

• Prices:– Land Registry– Zoopla, Rightmove, etc.

• Price indices– Land Registry– Nationwide, Halifax

NON-DOMESTIC - Value

Influences on propertyinvestment returns and yields

44

Main variables affecting all property returns:•Supply of floorspace in relevant sector•Inflation•Exchange rate•Interest rates

Main variables affecting property yields:•Rents•Inflation•Interest rates•Bond yields•institutional investment in property•company productivity

Influences on propertyinvestment returns and yields

45

Main variables affecting office property returns•GDP•Service sector employment•Gilt yields•Exports / imports of services•Stock market indices•Company sector liquidity•Fixed investment•Company productivity•Corporation tax

Main variables affecting industrial sector property returns:•GDP•Manufacturing output•Capacity utilization•Gilt yields•Manufacturing earnings•Manufacturing productivity•Exports (goods)•Company productivity•Imports (goods)•Fixed investment

Main variables affecting retail property returns:•Consumer expenditure•Sales•Employment•Savings ratio•Personal sector liquidity•Company profitability•House prices•Housing starts•Average earnings•Personal disposable income•Personal sector retail credit•Car sales

Investment market data• Market reports

– CBRE UK Prime Rent & Yield Monitor and Monthly Index– JLL UK Property Index

• IPD– Annual index– Property Investors Digest– Local Markets

• IPF– Consensus Forecast

Source: IPD

Source: IPD

Source: IPD

Source: IPD

Source: IPD

Market dynamics• Property cycle different and partly independent of underlying business

cycle• Cycle more exaggerated in development sector than in occupier sector

(rents and vacancy rates)• Vacancy cycle tends to slightly lead rent cycle (usually peaks before

rent bottoms)• New development tends to peak when vacancy peaks

Formal models

• Demand (including elasticities)

• Supply (including elasticities and lags)

• Equilibrium (including landlord behaviour)

Market researchDefine geographical and temporal extent

Property

MACRO-ECONOMIC INDICATORS

• Economic activity– Output (GDP)– Industrial output– Retail sales– Net trade– Number of businesses, employment, turnover,

profits and investment (by sector)– Business and individual bankruptcies, business

insolvencies

• Labour market– Employment and unemployment

• Finances– Money and lending (inc. lending on dwellings)– Public sector debt– Inflation (CPI/RPI)– Interest rates, yields and exchange rates or here– Disposable income

• Real Estate– Property Transactions in the UK– Business rates– Number of (and level of employment in)

construction and real estate firms– Property-specific stats from macro-econ

stats above...

Key statistical data sources•ONS website•UK National Accounts (The Blue Book)•Annual Abstract of Statistics•UK Business / IDBR•Construction Statistics Annual

Key statistical data sources•ONS website•UK National Accounts (The Blue Book)•Annual Abstract of Statistics•UK Business / IDBR•Construction Statistics Annual

UK National Accounts (The Blue Book)

• Ch1: Main aggregates and summary accounts– GDP, employment, GDP per head

• Ch2: Industrial analyses– Includes real estate industry

• Ch10: Non-financial balance sheets– MV of non-financial assets inc’g real estate– Measure of wealth

Annual Abstract of Statistics

• Population (Ch5)• Education (Ch6)• Labour market (Ch7)• Income and wealth (Ch8)• Housing (Ch14)• National accounts (Ch16)• Prices (Ch17)• Government finance (Ch18)• Trade and investment (retail trade – Ch24)• Industrial analyses (inc. building and construction – Ch22)

UK Business: Activity, Size and Location

Analysis of local units and VAT/PAYE based enterprises by• Broad industry group• Employment size band• SIC• Turnover• Location (Local authority and SOA level)

Construction Statistics Annual

New Orders (Ch1)

Output (Ch2)

Price Indices (Ch4)

Cost Indices (Ch5)

Investment (Ch6)

Commercial floor space (Ch7)

Planning applications and decisions (Ch11)

COMMUNITY INDICATORS• Demographics• Socio-economic status• Employment , unemployment• Poverty and deprivation• Crime• Education• Health• etc.

COMMUNITIES DATA• Census

– Neighbourhood Statistics– Key Statistics – OAC

• Indices of deprivation• Experian

Subject property• 43 Queen Square, Bristol...• Appraisal... spreadsheet

Comparable...

22-24 Queen Square,

Bristol• Grade II listed terraced office

building. The building was redeveloped in 2007 and the Grade II listed façade was retained

Sold to Invista December 2006 for £8.5m (4.87%)

Sold by Invista to Epic May 2008 for £6.2m (6.5%)