Download EIU proposal - Economist Intelligence Unit

The Future of Global Real Estate
A syndicated research
programme uncovering
the future of global
property values
Economist Intelligence Unit
Country and Economic Research
March 2009
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Our proposed methodology
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A new dawn for real estate?
• Economic boom of the last six years characterised by:
- huge increase in credit and liquidity
- high demand for assets – equities, bonds, commodities, property
• Nevertheless, cheap credit not the only driver of property prices
- demographic trends
- changes in incomes
Long-term “fundamentals”
- pace of urbanisation
- macroeconomic environment
• But in many markets property prices rose far above a level which could be
justified by these long-term drivers, i.e. above “fair value”
• Recent credit crunch accompanied by property bust of spectacular proportions
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What about existing real estate research?
• Not many ‘global’ products as such
- different consultancies focussing on different regions
- e.g. Global Insight & Moody’s for US, Jones Lang LaSalle for
separate regions
- coverage mostly for developed / OECD economies
• Many survey based forecasts
- short-term forecasts; limited country coverage
- e.g. PwC “Emerging Trends in Real Estate”
• Modelling based on macroeconomic fundamentals seems
restricted to academic research and international
organisation working papers
- e.g. International Monetary Fund’s (IMF) World Economic
Outlook, 2008; OECD Economic Outlook No.78, 2005
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Our methodology
• Theoretical background:
- IMF, WEO 2004: “House prices in Australia, UK, Ireland and Spain
exceeded their predicted values by 20 pc”
- IMF, WEO 2007: “During 1997 to 2007 […] house prices were [up to] 30
pc higher than justified by the fundamentals”
- OECD, Economic Outlook
2005:”To address [overvaluation]
it is necessary to relate these
prices to their putative underlying
determinants”
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Our methodology
• Econometric analysis to arrive at a real estate 'fair' price equation
- based on a regression which best explains past price fluctuations given
historical economic data
- determine what should have happened to prices given the path of
economic fundamentals in the past and determine the 'price gap‘
• Forecasts: apply price equation to our in-house macroeconomic
forecasts
- determine the future path of 'fair' prices of real estate in light of future
macroeconomic conditions
- EIU’s forecasting approach will combine long-term economic forecasting
with property specific factors and will ensure that price forecasts take
appropriate account of the state of the economy and income levels.
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Why the Economist Intelligence Unit?
Independent, long-run perspective required
Some property specialists will forecast property prices based on historic
trends and industry specific factors (such as availability of planning
permits etc). But a truly insightful long run property forecast requires
much more than this - it needs to be rooted in a deep understanding of
the broader national and international economic context.
This is an area in which the EIU has a proven track record. Therefore the
EIU’s forecasting approach, which combines long-term economic
forecasting with property specific factors, is designed to ensure that our
forecasts take appropriate account of the state of the economy and
income levels. Many of the mistakes in forecasting property prices in the
past have arisen because these factors were not taken sufficiently into
account.
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Why the Economist Intelligence Unit?
World leader in country analysis and forecasting.
For over 60 years we have provided business intelligence that corporate
executives, government officials and academics require to understand
developments around the world.
We cover more than 200 countries, providing economic forecasts on
the world's 150 largest markets.
A truly insightful long run property forecast needs to be rooted in a deep
understanding of the broader national and international economic context.
This is an area in which the EIU has a proven track record.
It is our analytical framework and forecasting methodology that
gives us our competitive edge.
Our approach combines the best in analysis–drawing on the country
expertise of our specialists–and the best in forecasting, grounded in
tested models, carefully vetted data and a quality–control process that
ensures both accuracy and consistency.
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Our methodology – variables to test
Price equation variables
Dependent variable
Change in real residential/commercial property price
Explanatory variables
Explanation / Hypothesis
Lagged change in real price
‘Persistence’ effect
Price divided by personal income per capita
‘Reversion’ effect or affordability indicator
Growth in personal income per capita
Reflects growing wealth and propensity to buy property
Income and corporation tax rates
Act as downward pressures on the propensity to buy real estate
Short-term interest rate (real and nominal; current and
lagged)
To reflect cost of borrowing for home-owners
Long-term interest rate (real and nominal; current and
lagged)
Reflects long-term financing costs for commercial property development
Change in stockmarket prices
Potential substitute for speculative investment
Population growth
Creating higher demand and upward pressure on prices
Growth in the number of households
Creating higher demand and upward pressure on prices
Population aged 20-39 divided by total population
Reflecting pool of potential first-time buyers of property
Growth in supply of credit as percentage of GDP
To account for credit conditions which influence ability to finance property
acquisition
Unemployment
Business cycle indicator and potential pool of consumers/labour force
Residential/commercial rental yield
To account for buy-to-let investors; also to account for rental market substitute
Global /regional real estate prices
Relative domestic price to global prices, reflecting decision to buy/sell in other
regions
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Our methodology – UK residential case study
We are already able to accurately model quarterly UK residential property
prices:
1.06
Real house price growth
(Source: DCLG)
EIU model estimate 1.04
1.02
.010
1.00
.005
0.98
Model 1 drivers:
- Income growth
- Previous growth in price
(speculator effect)
- Interest rates
- Population growth
- Growth in domestic credit
- Labour market conditions
.000
-.005
-.010
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Residual
Actual
Fitted
But what would have
happened if prices were
driven only by economic
fundamentals?
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Our methodology – UK residential case study
Annual UK property prices based on ‘fundamentals’:
.3
Real house price growth (Source:
DCLG)
.2
.1
.0
.15
EIU fair price model
estimate
.10
-.1
Model 2 drivers:
-
Income growth
Interest rates
Population growth
Economic development
Labour market conditions
-.2
.05
Actual prices rose faster
than the economic
fundamentals since 1997
.00
-.05
-.10
82 84 86 88 90 92 94 96 98 00 02 04 06 08
Residual
Actual
Fitted
But undervalued from
1990 to 1996
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Our methodology – Spain residential case study
Again, controlling for fundamentals, residential prices in Spain rose above our
‘fair’ value from 2003. During the economic downturn, we expect actual prices to
converge towards the “fairer” levels and even undershoot based on past trends.
Spain house price index, 2002=100
180
Real house price
160
EIU fair price
140
Price
gap
Model 3 drivers:
- Income growth
- Interest rates
- Population growth
- Labour market conditions
120
100
80
Source: Banco de Espana; Economist Intelligence Unit
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estimates
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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Our methodology – UK commercial case study
We have also applied our approach to commercial property values. The
preliminary results are shown below. Changes in key economic variables are
able to explain much of the change in commercial property prices
Model 4 drivers:
- Income growth
- Interest rates
- Population growth
- Labour market
conditions
- Residential prices
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Our proposed deliverables
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A new dawn for real estate?
A model of residential and commercial property prices in over 50
countries and 70 cities to identify "fair value" for each market based on
long-term fundamentals.
An exciting research project that will provide members with exclusive
insight into the real estate market around the world.
• In which countries is real estate overvalued and how
low are prices likely to fall?
• When can we expect a recovery?
• Which markets are undervalued and where will the next
investment opportunities occur?
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What will our research provide?
There are numerous benefits arising from participating in this programme:
• Access price data for over 50 countries and 70 cities
via a secure online platform
• Identify which markets are over- or undervalued and
target your investments effectively
• Download exclusive forecast data for residential and
commercial property prices to 2020
• Network with peers online
• Understand the key economic fundamentals driving
real estate market prices around the world
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Geographical coverage
Countries – over 50
Americas Western Europe
Eastern Europe Middle East & Africa
Asia Pacific
Argentina Austria
Netherlands
Bulgaria
Israel
Australia
Brazil*
Belgium
Norway
Croatia
South Africa
China
Canada
Cyprus
Portugal
Czech Republic United Arab Emirates
Hong Kong
Colombia Denmark
Spain
Estonia
India
USA
Finland
Sweden
Hungary
Indonesia
France
Switzerland
Latvia
Japan
Germany
United Kingdom
Lithuania
Malaysia
Greece
Poland
New Zealand
Iceland
Serbia
Philippines
Ireland
Slovak Republic
Singapore
Italy
Slovenia
South Korea
Luxembourg
Turkey
Taiwan
Malta
Ukraine
Thailand
* Commercial only
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Geographical coverage
Cities - over 70
Americas
Western Europe
Eastern Europe Middle East & Africa Asia Pacific
Boston
Chicago
Denver
Las Vegas
Los Angeles
Miami
New York
San Diego
San Francisco
Washington
Toronto
Montreal
Vancouver
Buenos Aires
Bogota
Sao Paulo*
Rio*
Mexico City*
Amsterdam
Athens
Berlin
Birmingham
Brussels
Copenhagen
Dublin
Edinburgh
Frankfurt
Glasgow
Helsinki
Lisbon
London
Madrid
Manchester
Milan
Munich
Oslo
Belgrade
Bratislava
Budapest
Istanbul*
Kiev
Kosice
Krakow
Ljubljana
Prague
Riga
Sofia
Tallinn
Vilnius
Warsaw
Zagreb
Paris
Rome
Stockholm
Vienna
Zurich*
Dubai
Tel Aviv (tbc)
Johannesburg
Bangkok
Delhi
Jakarta
Kuala Lumpur
Manila
Mumbai
Seoul
Shanghai
Taipei (tbc)
Tokyo
Sydney
Melbourne
Auckland
Wellington
* Commercial only
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What are the research deliverables?
1. Online access
A dedicated, secure micro-site for downloading and manipulating data
and analyses, including a discussion-forum with EIU analysts and other
syndicate members
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What are the research deliverables?
2. Real estate database
Access comprehensive data on residential and commercial real estate
prices for over 50 countries and 70 cities, annual and quarterly,
including latest data and historical time series (480 data series)
3. Market studies
Briefing papers on the history and outlook for real estate for each
country, including summary reports on the medium-term
macroeconomic outlook
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What are the research deliverables?
4. Forecasts and scenario testing
Interactive forecasting model with residential and commercial price
projections to 2020 with adjustable parameters for various forecast
scenarios
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4. Forecasts and scenario testing
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Timeline, syndicate fees and project team
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Timing
Project plan - Real Estate Syndicate
Contracts finished, clients on board
Data collection - all price series (A & Q) (city/country)
Data collection - macro drivers (A & Q) (country)
Data collection - macro drivers (A & Q) (city)
Week 1 Week 2
1
Week 3
Week 5
Week 6
Week 7
Week 8
Database buliding
1
1
building - residential (country) (A & Q)
building - residential (city) (A & Q)
building - commercial (country) (A & Q)
building - commercial (city) (A & Q)
1
1
1
1
1
Model forecasts finalised and checked
1
1
1
Delivery
1
1
1
1
1
Reports sub-edit & finalised
Micro-site construction
Week 10
1
1
1
Country briefings write up
Main report write-up
Week 9
1
Desk research - extra data collection
Model
Model
Model
Model
Week 4
1
1
1
1
1
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The team
Project management team
• Andrew Williamson, Global Director Economic Research
• Gavin Jaunky, Senior Economist
• Robert Metz, Senior Analyst
Economics team
• Robin Bew, Editorial Director and Chief Economist
• Robert Ward, Director, Global Forecasting
• Chris Pearce, Director, Economics Unit; Director, Data Services
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•
•
•
•
•
Regional teams
Charles Jenkins, Regional Director, Western Europe
Pat Thaker, Regional Director, Africa
Laza Kekic, Regional Director, Central & Eastern Europe; Director, Country
Forecasting Services
Justine Thody, Regional Director, Latin America
Gerard Walsh, Regional Director, Asia
David Butter, Regional Director, MENA
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Fees
• £16,000 / US$24,000
For more information, please contact us using the customer enquiry
form at www.eiu.com/property
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