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The contribution of spatial dependency to office building price indexes: A Melbourne case study

Jerry Liang (Department of Finance, Deakin University, Melbourne, Australia)
Richard Reed (Department of Finance, Deakin University, Melbourne, Australia)
Tony Crabb (Savills Australia, Melbourne, Australia)

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 3 April 2018

Abstract

Purpose

The purpose of this paper is to investigate the role of spatial dependency in the construction of a price index for the transactions of whole office buildings. It examines transactions of office buildings over a 15-year period and addresses an under-researched area in investment property analysis.

Design/methodology/approach

The study examines data relating to transactions of all office buildings in the Melbourne (Australia) central business district between 2000 and 2015. The methodology uses a spatial weights matrix to construct a hedonic model, spatial error model, spatial lagged model and an office building transactional price index.

Findings

The findings confirm the existence of spatial dependency for the transactions of office buildings. In addition, incorporating the effect of spatial dependency by constructing spatial error and spatial lagged model improved the accuracy of the estimated transactional price index for office buildings.

Research limitations/implications

These findings make an important contribution to the literature by highlighting the importance of the issue of spatial autocorrelation in the estimation of valuation models and price indexes for office buildings. Until now the focus has predominantly been on individual office units rather than whole office buildings, where the barrier has traditionally been access to comprehensive data. The analysis did not consider leasing details as this information is not accessible in the Australian market.

Practical implications

The research will assist stakeholders including valuers, investors and market regulators to improve their understanding of movements in the office property transactional market. The findings provide an insight into trends associated with the transfer of office buildings. It will assist future decisions about the location of a new office building developments in order to optimise their proximity to transport and other buildings.

Social implications

The study will assist planners to ensure the location of office buildings are optimised from a social sustainability perspective. This equates to buildings located in close proximity to transport facilities and also supporting the development of office buildings in locations, which are associated with lower future risk.

Originality/value

The construction of an accurate and reliable property index is critically important for practitioners to understand the movement in both the property market and also in the broader economy. A substantial increase in whole office building acquisitions has been observed in recent years, especially after the 2007 Global Financial Crisis (Lizieri and Pain, 2014) although there has remained limited research undertaken in this area.

Keywords

Citation

Liang, J., Reed, R. and Crabb, T. (2018), "The contribution of spatial dependency to office building price indexes: A Melbourne case study", Journal of Property Investment & Finance, Vol. 36 No. 3, pp. 232-247. https://doi.org/10.1108/JPIF-03-2017-0021

Publisher

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Emerald Publishing Limited

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