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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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...
?
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%)