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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