to hold or not to hold?

To Hold or Not to Hold?

An Analysis of Holding Periods in Five European Property Markets

Jan Reinertjan.reinert@ipd.com

July 2013Portfolio Analyst, IPD GermanyPhD Candidate, University of Regensburg

Agenda

• Literature

• Data

• Analysis• Average Holding Periods• Determinants of Holding Periods• Holding Periods & Performance

• Conclusion

Literature

LiteratureRESEARCHERS MARKET TIME

PERIOD METHOD HOLDING PERIOD OTHER FINDINGS

Collett, Lizieri& Ward(2003)

London, UK

1981-1998

Cox proportional

hazard model

7-12 years (median for

standard shops)

Decreasing holding periods over time,holding periods differ by size & sector,

negative relationship between return volatility & holding period

Gardner & Matysiak

(2005)

London, UK

1983-2003

Based on sold

properties

4.6-7.0 years (median over

time)

Decreasing holding periods over time,holding periods differ by location & investor type,

25% of properties are resold after 3 years,declining pattern of return over holding period

Brown & Geurts(2005)

San Diego, United States

1970-1990

Based on sold

properties, OLS

regression

4.5 years(average for apartment buildings)

Property characteristics (besides size) do not affect holding periods

Fisher & Young (2000)

United States

1980-1998

Time until 50% of

sample has been sold

8.6-13.7 years (median

depending on sector)

Decreasing holding periods over time,holding periods differ by sector,

returns converge to market average as tenure lengthens

Cheng, Lin& Liu

(2010)

United States

1978-2008

Model for ex ante optimal holding period

4.3-5.3 years (expected optimal

holding period)

higher transaction costs lead to longer holding periods while price volatility decreases it

Data

Data Set

...supplied by IPD:

TransactionInformation

(purchase & sale dates.price. transaction costs)

PropertyCharacteristics

(location. sector. age. size.market rent)

PerformanceMeasures

(total return. income return,capital value growth)

MarketPerformance

(National IPD Indices)

InvestorInformation(Investor Type)

Data Set 51.110 Observations... ...from 5 European Countries

AnalysisAverage Holding Periods

Average Holding Periods (all years)

Bottom 10%

Top 10%Upper Q.

Lower Q.

AverageMedian

Distribution of Observations (by year of purchase)

Problem:sample selection bias due to

different time periods of data sets

reducing datasets to the same time period:1995-2012

Average Holding Periods (1995-2012)

Bottom 10%

Top 10%Upper Q.

Lower Q.

AverageMedian

Problem:Holding periods are only observed for sold properties, held properties are ignored

”Survival Rates”

Median

50% of properties in Sweden were sold after 6 ½ years while 50% of properties in

the UK were sold after 9 years.

10% 20% 30% 40% 50%

UK 1.8 years 3.0 years 4.3 years 6.1 years 9.1 years

Germany 4.2 years 8.3 years

France 3.0 years 4.9 years 7.8 years

Netherlands 2.5 years 4.7 years 6.3 years 9.4 years

Sweden 1.3 years 1.9 years 3.1 years 4.5 years 6.5 years

Survival Rates (1995-2012)

After what time have XX% of properties been resold?

Survival Rates (1995-2012)

Holding Periods over Time (by year of purchase)

Holding Periods over Time (by year of sale)

AnalysisDeterminants of Holding Period length

Average Transaction Costs (1995-2012)

Risk/Return Profiles (1998-2012)

1-for-1-trade-off

HPMONTHSINSURANCE 3.4**

PENSION 11.9***OPENFUND 4.8***

CLOSEDFUND 12.7***LISTEDCOMP 3.4*

UNLISTEDCOMP 1.3PRICEPURCH -0.0

PRICESALE 0.0***TCPURCH 0.1

TCSALE -0.0TR -2.9***RR 3.3***

STDEVRR -0.2***NETHERLANDS 18.8***

SWEDEN -46.5***FRANCE 23.6***

GERMANY -6.2**CONSTANT 84.3***

R2 0.22

OBS 9,723

Regression HPMONTHS

Y1995 22.7***Y1996 23.3***Y1997 14.6***Y1998 10.6***Y1999 5.0***Y2001 -4.8***Y2002 -1.6Y2003 -5.8***Y2004 -11.7***Y2005 -22***Y2006 -36.6***Y2007 -47.5***Y2008 -50.1***Y2009 -42.9***Y2010 -42.8***Y2011 -55***

METRO 0.6OFFICE -5.8**RETAIL -3.7

INDUSTRIAL 0.3RESIDENTIAL 8.2***

Regression UK NETHERLANDS SWEDEN FRANCE GERMANY

Y1995 23.1*** 50*** Y1996 24.7*** 43.6*** Y1997 18.1*** 37.9*** 43.2*** -1.1***Y1998 12.3*** 34.7*** 29.3*** 8.4Y1999 8.5*** 14.7*** -3.2 -33.5*** 14.1Y2001 -6.3*** -17.3*** -49.3*** -7.7 -4.6*Y2002 -5.3*** -26.2*** -99.1*** -10.6 -12.4Y2003 -4** -23.5*** -28*** -36.5*Y2004 -9.4*** -29.7*** 29.6 -47.7*** -27***Y2005 -26.1*** -22.1*** -8.5 -52.3*** -43.7***Y2006 -50.2*** -34.2*** -20.2* -57*** -40.9***Y2007 -75.5*** -73*** -47.2*** -79.8*** -48.1***Y2008 -82.8*** -158.1*** -69.2*** -91.1*** -60.7***Y2009 -46.9*** -67.7***Y2010 -35.7*** -52.9*** -73.7***Y2011 -60.2***

METRO 0.2 3.7 1 0.7 4.7***OFFICE -9.7*** -29.7*** -25.7** -18.4** 11.1RETAIL -9.6*** -6.8 -10 -0.2 1.2*

INDUSTRIAL -1.8 -10.8 0.4 -24.8*** 5.2RESIDENTIAL 17*** -8.4 3.9 -21.4* -15.9INSURANCE 2.2 -18.3*** 2.8 14.2** -25.4*

PENSION 10.5*** 10.8* 8.5 -94.5***OPENFUND 1.2 -3.8 18.2* -16.2***

CLOSEDFUND 4.7 0.5 -1**LISTEDCOMP -1.8 11.4** 15.7*** -27

UNLISTEDCOMP 0.8 -10.5*** 13.5* -3.3 -0.6*PRICEPURCH 0*** 0 0* 0 0

PRICESALE 0*** 0*** 0*** 0 0***TCPURCH 0 0 3.9*** 1.2** 0.4***

TCSALE -0.2 -0.6 -1.8** 2.9*** 0.3TR -4.2*** -13.5*** 7.4*** -3.9*** 10.8RR 4.8*** 15.9*** -7.4*** 4.1*** -11.1***

STDEVRR -0.2*** -0.4** -0.1 0 -0.3***CONSTANT 103.5*** 233.6*** 134.7*** 131.8*** 56.1

R2 0.24 0.58 0.49 0.51 0.67

OBS 8257 591 393 330 152

Heckman Correction…in progress…

Problem:Censored data – Holding periods are only observed for sold properties, held properties are ignored

AnalysisHolding Periods & Performance

Holding Period & Excess Return (1995-2012)

Holding Period & Excess Return (all years)

Conclusion

Conclusion I• Holding periods seem to differ by country: between 1995-2012 the

Netherlands had the longest while Sweden had the shortest simple average holding period

• Survival rates show that after 9 years 56% of properties in Sweden had been sold again while only 21% of properties in Germany had been resold

• 50% of properties in the UK and Sweden had been resold after 9 and 6 ½ years respectively

• Over the period of analysis less than 50% of properties in the Netherlands, France and Germany had been resold

• Holding periods in the UK seem to be declining since 1980 but the same cannot be said for the Netherlands and Sweden

Conclusion II• Transaction costs were lowest in Sweden (which also had the shortest

average holding period)

• France had the highest average transaction costs (especially for sales)

• Between 1998-2012 the UK market displayed the highest volatility while Germany was the least volatile (Sweden displayed the 2nd highest volatility)

• A regression over all countries showed that transaction costs did not influence holding periods (differening results in individual countries)

• Relative return had a positive impact on holding periods while return volatility had a negative impact

• In line with other studies, a pattern of declining excess return over holding period length was identified

Conclusion IIIHolding period analysis is constrained by the problem of

CENSORED DATAHolding periods of properties still held by investors are

unobservable.

This can explain:

a) differing average holding periods across countries

b) declining holding periods over time

c) pattern of declining excess return over holding period

Thank you for your attention.

Jan Reinertjan.reinert@ipd.com

Portfolio Analyst, IPD GermanyPhD Candidate, University of Regensburg