Transcript Chapter 2 Macroeconomic Considerations

Macroeconomics
and 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
Real Estate
Classification
Activity
Analysis
Real Estate
Classification
Demand
Sectors
Geography
Uses
Quality
Activity
Analysis
Real Estate
Classification
Demand
Sectors
Geography
Uses
Quality
Activity
Analysis
‘Derived’ demand sectors
•
Development
•
Occupation
•
Investment
Real Estate
Classification
Demand
Sectors
Geography
Uses
Quality
Activity
Analysis
Geography
•
International
•
Regional
•
City-regions
•
Towns and cities
•
In-town / out-of-town
•
Neighbourhoods
•
Streets
Real Estate
Classification
Demand
Sectors
Geography
Uses
Quality
Activity
Analysis
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
Real Estate
Classification
Activity
Analysis
Demand
Sectors
Geography
Uses
Quality
Quality
•
Prime
•
Secondary
•
Tertiary
• Many types of shop
• Investors seek ‘prime’ property
• Secure due to ‘goodwill’ and capital
investment by tenant
• New areas more risky - turnover rent
- city centre prime mall
Retail – city centre prime
Retail – city tertiary
Retail
– city
centre
secondary
Retail – out of town prime mall
Offices – city centre prime…
…and conversionsprime/secondary
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
A2 (professional and financial services) when premises
have a display window at ground level
A3 (restaurants and cafes)
A4 (drinking establishments)
A5 (hot food takeaways)
B1 (business) (permission limited to change of use relating
to not more than 235 square metres of floor space)
B2 (general industrial)
To
A1 (shop)
A1 or A2
A1 or A2 or A3
A1 or A2 or A3
B8 (storage and
distribution)
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)
Casinos (sui generis)
C3 (dwellinghouses)
D2 (assembly and leisure)
Light
industrial
trading estate
Heavy
industrial
manufacturing
Office / warehouse
out of town
Warehousing
trading estate
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 and
out of town complex
Residential
Real Estate
Classification
Activity
Key indicators
Development
& Land
Market
Occupation
Investment
Local markets
National &
International
Markets
Analysis
Real Estate
Classification
Activity
Key indicators
Development
& Land
Market
Occupation
Investment
Local markets
National &
International
Markets
Analysis
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
Developers
o
o
o
Merchant developers
Investor developers
Owner occupiers
Vacancy (shops)
End of Year Report 2009: Dawn of a better market! 10th February 2010 Local Data Company
29
Key indicators: demand and
market clearing
Occupiers
• Prices
• Rents and lease terms
– Care over rent definitions: asking, headline, effective
Occupiers
o
o
Tenants
Owner occupiers
• Rate of change in rents and prices over time
Investors
Investors
• Prices (capital values)
o Institutions
o Overseas
• Yields
o Private
All
• 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)
Real Estate
Classification
Activity
Key indicators
Development
& Land
Market
Occupation
Investment
Local markets
National &
International
Markets
Analysis
Development
• Supply side variable
• Supply pipeline (by sector and
graded according to quality)
Land where
planning
permission is
sought
Land with
planning
permission
Space under
construction
Available
space
• Consider
– Appropriate spatial scale
– Probability of completion
– Net addition to supply (i.e.
deduct demolitions and
conversions)
– Refurbishments
• 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’
Land market
• Land prices – market clearing or equilibrium variable
– VOA Property Market Report: live link
Real Estate
Classification
Activity
Key indicators
Development
& Land
Market
Occupation
Investment
Local markets
National &
International
Markets
Analysis
NON-DOMESTIC - Stock
2
000m
100,000
Other bulk premises
Warehouses
Factories
Offices
Retail
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
North East
North
West
Yorkshire
and the
Humber
East
Midlands
West
Midlands
East of
England
London
South
East
South
West
Total floorspace of commercial and industrial properties in England and Wales = 596m sqm
Wales
NON-DOMESTIC - Occupiers
Source: UK Business
NON-DOMESTIC - Value
Around half of the non-domestic stock is owner-occupied, the other half owned by
investors
Source: UK National Accounts (The Blue Book)
37
Source: UK National Accounts (The Blue Book)
38
Rateable value per m 2
160
(£)
140
120
100
80
England & Wales average
60
40
20
0
North East North West Yorkshire
and the
Humber
East
Midlands
West
Midlands
East of
England
London
South East
South
West
Wales
Retail premises have the highest rateable value (£128/m2) and factories the lowest (£29/m2)
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
40
DOMESTIC: Residential (live tables)
•
•
•
•
•
•
•
•
•
•
•
•
•
Stock
House building
Housing renewal (including Disabled
Facilities Grants)
Household estimates and projections
Housing market and house prices
Rents, lettings and tenancies
Homelessness
Household characteristics
Housing finance and household
expenditure
Social housing sales
Affordable housing supply
Repossession and repossession
prevention
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
Real Estate
Classification
Activity
Key indicators
Development
& Land
Market
Occupation
Investment
Local markets
National &
International
Markets
Analysis
Influences on property
investment returns and yields
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
44
Influences on property
investment returns and yields
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
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
45
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
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% per annum
40.00
30.00
Inflation (RPI, DecDec)
All Property Total
Return
20.00
10.00
0.00
-10.00
-20.00
-30.00
Source: IPD
60.00
Equities (FTSE All Share)
50.00
Bonds (15-20 year)
40.00
All Property Total Return
20.00
10.00
0.00
-10.00
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% per annum
30.00
-20.00
-30.00
-40.00
Source: IPD
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% per annum
30.00
20.00
10.00
0.00
-10.00
-20.00
-30.00
Source: IPD
All Property Total
Return
Income Return
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% per annum
40.00
30.00
Retail Total
Return
Office Total
Return
20.00
10.00
0.00
-10.00
-20.00
-30.00
Source: IPD
All
Property
Industrial
Bonds (15Total
Retail Total Office Total Total
Equities
20 year)
Return
Return
Return
Return
Last...
Inflation
(RPI, DecDec)
3 years
2.70
1.40
7.70
-2.50
-2.00
-3.2
-3.1
5 years
3.30
5.10
5.90
1.10
0.30
2.1
0.6
10 years
2.90
3.70
5.90
6.80
7.30
5.9
6.7
Retail Bank
Base Rate
(year-end)
Equities
SD 1981-2010
3.89
16.41
11.42
10.30
SD last 10 yrs
1.79
20.49
4.84
12.69
SD last 5 yrs
2.30
22.64
6.47
16.15
Source: IPD
Bonds (15-20 All Property
year)
Total Return
Real Estate
Classification
Activity
Key indicators
Development
& Land
Market
Occupation
Investment
Local markets
National &
International
Markets
Analysis
Real Estate
Classification
Activity
Key indicators
Development
& Land
Market
Occupation
Investment
Local markets
National &
International
Markets
Analysis
Real Estate
Classification
Activity
Analysis
Market
Dynamics
Market
Research
Appraisal
Real Estate
Classification
Activity
Analysis
Market
Dynamics
Market
Research
Appraisal
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)
Real Estate
Classification
Activity
Analysis
Market
Dynamics
Market
Research
Appraisal
Market research
Define geographical and temporal extent
National / International
Region / urban area
Local market /
neighbourhood
Property
MACRO-ECONOMIC INDICATORS
•
Economic activity
–
–
–
–
–
–
•
Real Estate
–
–
–
Output (GDP)
Industrial output
Retail sales
Net trade
Number of businesses, employment,
turnover, profits and investment (by sector)
Business and individual bankruptcies,
business insolvencies
–
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...
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
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
Real Estate
Classification
Activity
Analysis
Market
Dynamics
Market
Research
Appraisal
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%)
Real Estate
Classification
Activity
Analysis
Demand
Sectors
Key indicators
Market
Dynamics
Geography
Development
& Land
Market
Market
Research
Uses
Investment
Appraisal
Quality
Occupation
Local markets
National &
International
Markets