19-Jun-2010

Yield development in the real estate office market: The effect of obsolescence

Prof. Dr. Aart C. Hordijk MRICSH.H. Koerhuis-Gritter MSc.

19-Jun-2010 2

Contents

•Why bother about obsolescence?

•Data

•Analysis

•Results

•Conclusions

•Suggestions for further research

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Why bother about obsolescence?

•Buildings grow old

•Valuations: – GIY/NIY method raise on initial yield

– DCF method exit value

•Obsolescence hidden because of continuing

sharpening of yields in rising markets

•Change in market circumstances

•Renovation or depreciation

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Data

•ROZ/IPD Property index

•15 years of valuation data

•Unique dataset offers research opportunities

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Analysis

•1 Reversionary yield vs exit yield (DCF

Method)

•2 Yield in relation to year of construction

•3 Yield of properties 10 years in index vs

market yield

•4 Market rent in relation to year of

construction

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Explanations

•Initial yield: Contract rent (excl vacancy) Value of the property

•Reversionary yield: Market rent (incl vacancy) Value of the property

•Exit yield: Market rent (excl vacancy) in year 11 Value of the property in year 11

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Analysis 1: Method

Reversionary yield vs exit yield (DCF Method)

•1995 – 2008 data

•Reversionary yield instead of initial yield

•10 years DCF horizon

•Difference between weigthed average RY and

EY– Absolute and in percentage terms

•Centre vs non-centre locations

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Analysis 1: Results

• Average % difference 11.4% for a 10 years period (1.1% per year)• Average absolute difference is 0.92 % point (0.09 % point per year)

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

Absolute difference RY - EY

Absolute difference RY-EY

Average absolute difference RY-EY

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Analysis 1: Results

• Spread is less for offices on centre locations (0.82 % point) than for offices on non-centre location (0.93 % point)

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Spread RY - EY

Centre

Non-centre

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Analysis 2: Method

Yield in relation to year of construction

•1995 – 2008 data

•Reversionary yield, weigthed average

•Year of construction classes: < 1985

1985 – 1989

1990 – 1994

1995 - 1999

2000 - 2004

> 2004

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Analysis 2: Results

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

RY per year, per year of construction

2001

2002

2003

2004

2005

2006

2007

2008

• On average a 10 year younger building had a 0.8% point lower yield, which means 0.08% point per year

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Analysis 3: Method

Held properties vs market yield

•1999 – 2008 data

•243 properties which have been in the ROZ/IPD

Index for 10 years

•Market yield as calculated by IPD

•Difference absolute and in percentage terms

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Analysis 3: Results

• The longer properties are in portfolio the more their

performance will stay behind the market

performance

• Obsolescence is on average 0.07% point per year• In percentage terms the difference 1% per year

-0,40

-0,30

-0,20

-0,10

0,00

0,10

0,20

0,30

0,40

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

RY held properties - RY market

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Analysis 4: Method

Market rents per year of construction

•Market rents per square meter from 2001 to

2008

•Year of construction classes as in analysis 2

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Analysis 4: Results

100

110

120

130

140

150

160

170

2001

2002

2003

2004

2005

2006

2007

2008

Class Year of construction

Average market rent (€)

1 1985 - 1989 121 2 1990 - 1995 129 3 1995 - 2000 141 4 2000 - 2004 142

• On average 16 euro decrease in market rent in 10

years

• Average market rent is 130 euro, so 12% decrease in

10 years, which is around 1 percent per year

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Conclusions

•Obsolescence in yield varies between 0.09,

0.08 and 0.07 percentage point per year as

result from analysis 1, 2 and 3 (1% per year in

percentage terms)

•Obsolescence in rent around 1 percent per year

in analysis 4

•In general obsolescence turns out to be higher

than generally is expected

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Further research

•Research is based on office figures from The

Netherlands alone

•Extention of the research to other countries is

highly recommended

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Thank you!

Contacts:

•Prof. Dr. Aart C. Hordijk MRICS•University of Tilburg•a.c.hordijk@tiasnimbas.edu

•Leonie Koerhuis-Gritter MSc.•IPD Netherlands•leonie.koerhuis@ipd.com