Michael Haddock Stockholm 25 th June 2009 Are prime rents an adequate proxy for ‘the market’?
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Transcript of Michael Haddock Stockholm 25 th June 2009 Are prime rents an adequate proxy for ‘the market’?
CB Richard Ellis | Page 3
The Problem
Opaque markets
Incomplete information on transactions
Incomplete information on available properties
Short history of professional research
If one wants to look at the evolution of markets over more than the last cycle, then the only data available is prime rents and prime yields…
…but are they indicative of the behaviour of the market as a whole.
CB Richard Ellis | Page 4
The Problem
Need to test the hypothesis that prime indices are an adequate proxy for ‘the market’ for the purposes of
– Measuring market behaviour
– Forecasting market performance
– Investment strategy
Analysis based on data for Madrid, Amsterdam and London
CB Richard Ellis | Page 6
The Data
Madrid Leasing transactions since 1990
80%+ of all transactions
Date (quarter), Headline rent, Floor area, Submarket
Quarterly prime rent since 1973
CB Richard Ellis | Page 7
0
100
200
300
400
500
600
700Q
1 19
90
Q1
1991
Q1
1992
Q1
1993
Q1
1994
Q1
1995
Q1
1996
Q1
1997
Q1
1998
Q1
1999
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
€ /s
q m
/ann
um
Prime Rent
Floorspace Weighted Average
Peak Rent
Madrid data series
Source: CB Richard Ellis
CB Richard Ellis | Page 8
Madrid Conclusions
Peak (objective) and Prime (subjective) track closely. No evidence of observer bias.
– prime rents appear to add value
Turning points track closely for Prime and Average
– correlation 0.90
– prime rent may lead the market by 3-6 months
Volatility is similar for prime and average
– prime may be slightly more volatile
Short-term growth rates are similar
Long-run growth rates seem to diverge
CB Richard Ellis | Page 10
The Data
Amsterdam Leasing transactions since 1985
c55% of all transactions
Date (year), Headline rent, Floor area
Quarterly prime rent (since 1973)
ROZ/IPD annual rental growth (since 1994)
CB Richard Ellis | Page 11
0
50
100
150
200
250
300
350
400
45019
85
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
(€ /
sq m
/ann
um)
0
20
40
60
80
100
120
140
160
Inde
x (1
994
= 1
00)
Floorspace Weighted Average
Simple Average
Prime Rent
Peak Rent
IPD (Index) rhs
Amsterdam data series
Source: CB Richard Ellis
CB Richard Ellis | Page 12
Amsterdam Conclusions
Peak (objective) and Prime (subjective) track closely. No evidence of observer bias.
– prime rents appear to add value
Turning points track closely for Prime and Average
– correlation of 0.98
– no evidence that prime leads (although annual data)
Volatility is similar for prime and average
– prime may be slightly more volatile
Long-run growth rates seem to diverge
CB Richard Ellis | Page 13
Amsterdam Conclusions v IPD
Prime rent shows a better correlation with IPD rental value growth than the peak or average rent series
– correlation of 0.98 at t-1
Prime and average rents are a leading indicator (by 1 year) of IPD rental value growth
IPD rental value growth is less volatile than prime rents
Long-run growth rates seem to diverge
Is this evidence of valuation smoothing and lag?
CB Richard Ellis | Page 15
The Data
London Quarterly prime rent (since 1976)
IPD Monthly rental value index (since 1985)
CB Richard Ellis | Page 16
0
20
40
60
80
100
120
140Q
4 19
86
Q4
1987
Q4
1988
Q4
1989
Q4
1990
Q4
1991
Q4
1992
Q4
1993
Q4
1994
Q4
1995
Q4
1996
Q4
1997
Q4
1998
Q4
1999
Q4
2000
Q4
2001
Q4
2002
Q4
2003
Q4
2004
Q4
2005
Q4
2006
Q4
2007
Q4
2008
(£ /
sq f
t/an
num
)
0
50
100
150
200
250
(Ind
ex Q
4 19
86 =
100
)
Prime CityPrime West EndIPD City Rental Value GrowthIPD Mid-town & West End Rental Value Growth
London data series
Source: CB Richard Ellis
CB Richard Ellis | Page 17
London Conclusions - City
Good correlation (0.87) between prime and IPD
Prime rents less volatile than IPD!
Prime rent is a leading indicator of IPD by 6-9 months
– the lead time appears to be shrinking
Short-term growth rates are similar
Long-run growth rates seem to diverge
CB Richard Ellis | Page 18
0
20
40
60
80
100
120
140Q
4 19
86
Q4
1987
Q4
1988
Q4
1989
Q4
1990
Q4
1991
Q4
1992
Q4
1993
Q4
1994
Q4
1995
Q4
1996
Q4
1997
Q4
1998
Q4
1999
Q4
2000
Q4
2001
Q4
2002
Q4
2003
Q4
2004
Q4
2005
Q4
2006
Q4
2007
Q4
2008
(£ /
sq f
t/an
num
)
0
50
100
150
200
250
(Ind
ex Q
4 19
86 =
100
)
Prime CityPrime West EndIPD City Rental Value GrowthIPD Mid-town & West End Rental Value Growth
London data series
Source: CB Richard Ellis
CB Richard Ellis | Page 19
London Conclusions - City
Weaker correlation (0.80) between prime and IPD
Prime rents much more volatile than IPD!
Prime rent is a leading indicator of IPD by 3-6 months
The relationship changes radically after 2003
CB Richard Ellis | Page 21
Conclusions
Based on these three markets prime is an adequate proxy for ‘the market’ in the office sector
Turning points and volatility are similar
No evidence of observer bias in subjective prime rents
Prime may lead the market slightly
Prime appears to lead valuation based indices
The relationship can break down under some circumstances
CB Richard Ellis | Page 23
Further Research
Analysis of more cities necessary to conclusively justify prime rents
Other sectors may (indeed probably will) behave differently
The long-term difference in growth rates needs to be investigated:
– is it structural
– is it cyclical
Prime yields!