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Article
Publication date: 10 November 2020

Steven Devaney and David Scofield

Commercial real estate (CRE) is a major investment asset. Yet detailed information on the value of investible CRE in different cities is lacking. The authors propose an…

Abstract

Purpose

Commercial real estate (CRE) is a major investment asset. Yet detailed information on the value of investible CRE in different cities is lacking. The authors propose an innovative method to measure the value of investible CRE using transaction datasets.

Design/methodology/approach

The authors take transaction prices and index them to produce a time series of values for each asset. The sum of the values at each point represents the value of investible CRE at that date. The authors’ method is applied to transaction data for New York, London and Toronto.

Findings

London had the highest proportions of institutional and foreign ownership, and its turnover was more resilient to the downturn in global CRE following the GFC. The results illustrate the potential of the authors’ method to shed light on the characteristics of investible CRE markets.

Research limitations/implications

The authors use data from Real Capital Analytics (RCA). This provides good coverage of transactions for investible CRE in the cities that the authors examine, but data from other sources might lead to different estimates.

Practical implications

Measuring the value and turnover of investible CRE is important for portfolio strategies that account for the size and liquidity of investment markets. Knowledge of these features, and of ownership patterns, provides a better understanding of market operation.

Originality/value

The authors’ modification of the perpetual inventory technique is simple, novel and practical. The authors propose this approach given the absence of a building-by-building inventory of investible CRE in many markets.

Details

Journal of Property Investment & Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 6 March 2017

Danielle Claire Sanderson and Steven Devaney

The purpose of this paper is to investigate the relationship between occupiers’ satisfaction with the property management service they receive and the financial…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between occupiers’ satisfaction with the property management service they receive and the financial performance of commercial real estate.

Design/methodology/approach

The study uses occupier satisfaction data for 240 UK commercial properties collected over a 12-year period and the annual total returns achieved by those properties. Various statistical techniques are employed to assess whether increasing occupier satisfaction leads to greater returns for investors. These include comparing excess returns and risk-adjusted returns with occupier satisfaction at each property to assess whether superior property management generates outperformance (“positive alpha”). The study also investigates whether the relationship between occupier satisfaction and returns is the same across all sectors and whether it is affected by market conditions.

Findings

A positive correspondence is found between benchmark outperformance and occupier satisfaction. The relationship is similar for all sectors of commercial property and is particularly strong during the Global Financial Crisis, indicating that paying attention to satisfying the needs of occupiers has particular benefits during periods when the supply of commercial real estate exceeds demand.

Research limitations/implications

The sample of properties was restricted to those for which occupier satisfaction data had been collected by RealService Ltd and whose owners permitted access to the financial performance results. This meant that the properties belong to only three landlords, all UK REITs that care sufficiently about occupier satisfaction to commission studies. Thus the findings might not apply to all commercial properties. The mechanism by which the positive relationship between satisfaction and financial performance occurs is not tested, but the conventional mechanisms of reputation and customer loyalty (the “service-profit chain”) are discussed.

Practical implications

The findings suggest that it is worthwhile for landlords, or property managers acting on their behalf, to understand the needs of their occupiers in order to deliver the level of service that those occupiers desire. Leases in the UK are generally “triple net” and the total returns used for this analysis are net of property management costs, so the positive relationship between satisfaction and performance is not the result of economising on service delivery. A further implication is that valuers should take more account of occupier satisfaction when assessing the capital value of a property, from which total returns are assessed.

Originality/value

Demonstrating the links between customer service, customer satisfaction and business profitability is rarely attempted because of the many confounding factors that affect profitability. UK listed real estate companies are typically reluctant to reveal the financial performance of individual properties, and information about occupiers’ satisfaction is not generally available. The authors were fortunate to be granted access to a time series of such data, and to be able to demonstrate that attention to delivering a property management service that satisfies occupiers is likely to bring financial rewards to the owners of the property.

Details

Journal of Property Investment & Finance, vol. 35 no. 2
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 4 September 2017

David Scofield and Steven Devaney

The purpose of this paper is to understand what affects the liquidity of individual commercial real estate assets over the course of the economic cycle by exploring a…

Abstract

Purpose

The purpose of this paper is to understand what affects the liquidity of individual commercial real estate assets over the course of the economic cycle by exploring a range of variables and a number of time periods to identify key determinants of sale probability.

Design/methodology/approach

Analyzing 12,000 UK commercial real estate transactions (2003 to 2013) the authors use an innovative sampling technique akin to a perpetual inventory approach to generate a sample of held assets for each 12 month interval. Next, the authors use probit models to test how market, owner and property factors affect sale probability in different market environments.

Findings

The types of properties that are most likely to sell changes between strong and weak markets. Office and retail assets were more likely to sell than industrial both overall and in better market conditions, but were less likely to sell than industrial properties during the downturn from mid-2007 to mid-2009. Assets located in the City of London more likely to sell in both strong and weak markets. The behavior of different groups of owners changed over time, and this indicates that the type of owner might have implications for the liquidity of individual assets over and above their physical and locational attributes.

Practical implications

Variation in sale probability over time and across assets has implications for real estate investment management both in terms of asset selection and the ability to rebalance portfolios over the course of the cycle. Results also suggest that sample selection may be an issue for commercial real estate price indices around the globe and imply that indices based on a limited group of owners/sellers might be susceptible to further biases when tracking market performance through time.

Originality/value

The study differs from the existing literature on sale probability as the authors analyzed samples of transactions drawn from all investor types, a significant advantage over studies based on data restricted to samples of domestic institutional investors. As well, information on country of origin for buyers and sellers allows us to explore the influence of foreign ownership on the probability of sale. Finally, the authors not only analyze all transactions together, but the authors also look at transactions in five distinct periods that correspond with different phases of the UK commercial real estate cycle. This paper considers the UK real estate market, but it is likely that many of the findings hold for other major commercial real estate markets.

Details

Journal of Property Investment & Finance, vol. 35 no. 6
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 4 February 2019

Frank Kwakutse Ametefe, Steven Devaney and Simon Andrew Stevenson

The purpose of this paper is to establish an optimum mix of liquid, publicly traded assets that may be added to a real estate portfolio, such as those held by open-ended…

Abstract

Purpose

The purpose of this paper is to establish an optimum mix of liquid, publicly traded assets that may be added to a real estate portfolio, such as those held by open-ended funds, to provide the liquidity required by institutional investors, such as UK defined contribution pension funds. This is with the objective of securing liquidity while not unduly compromising the risk-return characteristics of the underlying asset class. This paper considers the best mix of liquid assets at different thresholds for a liquid asset allocation, with the performance then evaluated against that of a direct real estate benchmark index.

Design/methodology/approach

The authors employ a mean-tracking error optimisation approach in determining the optimal combination of liquid assets that can be added to a real estate fund portfolio. The returns of the optimised portfolios are compared to the returns for portfolios that employ the use of either cash or listed real estate alone as a liquidity buffer. Multivariate generalised autoregressive models are used along with rolling correlations and tracking errors to gauge the effectiveness of the various portfolios in tracking the performance of the benchmark index.

Findings

The results indicate that applying formal optimisation techniques leads to a considerable improvement in the ability of the returns from blended real estate portfolios to track the underlying real estate market. This is the case at a number of different thresholds for the liquid asset allocation and in cases where a minimum return requirement is imposed.

Practical implications

The results suggest that real estate fund managers can realise the liquidity benefits of incorporating publicly traded assets into their portfolios without sacrificing the ability to deliver real estate-like returns. However, in order to do so, a wider range of liquid assets must be considered, not just cash.

Originality/value

Despite their importance in the real estate investment industry, comparatively few studies have examined the structure and operation of open-ended real estate funds. To the authors’ knowledge, this is the first study to analyse the optimal composition of liquid assets within blended or hybrid real estate portfolios.

Details

Journal of Property Investment & Finance, vol. 37 no. 1
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 1 April 2004

Steven Devaney and Colin Lizieri

Structured sale and leasebacks and corporate property asset outsourcing are often claimed to have benefits that seem to be inconsistent with financial theory. Eight such…

Abstract

Structured sale and leasebacks and corporate property asset outsourcing are often claimed to have benefits that seem to be inconsistent with financial theory. Eight such UK deals are analysed to investigate the impact on corporate value. The results show that impacts are contingent ‐ on the capital structure of the firm, on the use of the capital raised and on market attitudes towards management and the sector. Two apparently similar deals can have quite different outcomes: benefits to shareholders and bondholders cannot be simply assumed.

Details

Journal of Corporate Real Estate, vol. 6 no. 2
Type: Research Article
ISSN: 1463-001X

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Article
Publication date: 29 April 2014

Steven Devaney

Price indices for commercial real estate markets are difficult to construct because assets are heterogeneous, they are spatially dispersed and they are infrequently…

Abstract

Purpose

Price indices for commercial real estate markets are difficult to construct because assets are heterogeneous, they are spatially dispersed and they are infrequently traded. Appraisal-based indices are one response to these problems, but may understate volatility or fail to capture turning points in a timely manner. This paper estimates “transaction linked indices” for major European markets to see whether these offer a different perspective on market performance. The paper aims to discuss these issues.

Design/methodology/approach

The assessed value method is used to construct the indices. This has been recently applied to commercial real estate datasets in the USA and UK. The underlying data comprise appraisals and sale prices for assets monitored by Investment Property Databank (IPD). The indices are compared to appraisal-based series for the countries concerned for Q4 2001 to Q4 2012.

Findings

Transaction linked indices show stronger growth and sharper declines over the course of the cycle, but they do not notably lead their appraisal-based counterparts. They are typically two to four times more volatile.

Research limitations/implications

Only country-level indicators can be constructed in many cases owing to low trading volumes in the period studied, and this same issue prevented sample selection bias from being analysed in depth.

Originality/value

Discussion of the utility of transaction-based price indicators is extended to European commercial real estate markets. The indicators offer alternative estimates of real estate market volatility that may be useful in asset allocation and risk modelling, including in a regulatory context.

Details

Journal of European Real Estate Research, vol. 7 no. 1
Type: Research Article
ISSN: 1753-9269

Keywords

Content available
Article
Publication date: 1 April 2005

Steven Devaney

Abstract

Details

Journal of Property Investment & Finance, vol. 23 no. 2
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 1 December 2003

Steven Devaney

Abstract

Details

Journal of Property Investment & Finance, vol. 21 no. 6
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 25 April 2008

Andrew Baum and Steven Devaney

The purpose of this paper is to consider prospects for UK REITs, which were introduced on 1 January 2007. It specifically focuses on the potential influence of…

Abstract

Purpose

The purpose of this paper is to consider prospects for UK REITs, which were introduced on 1 January 2007. It specifically focuses on the potential influence of depreciation and expenditure on income and distributions.

Design/methodology/approach

First, the ways in which depreciation can affect vehicle earnings and value are discussed. This is then set in the context of the specific rules and features of REITs. An analysis using property income and expenditure data from the Investment Property Databank (IPD) then assesses what gross and net income for a UK REIT might have been like for the period 1984‐2003.

Findings

A UK REIT must distribute at least 90 per cent of net income from its property rental business. Expenditure therefore plays a significant part in determining what funds remain for distribution. Over 1984‐2003, expenditure has absorbed 20 per cent of gross income and been a source of earnings volatility, which would have been exacerbated by gearing.

Practical implications

Expenditure must take place to help UK REITs maintain and renew their real estate portfolios. In view of this, investors should moderate expectations of a high and stable income return, although it may well still be so relative to alternative investments.

Originality/value

Previous literature on depreciation has not quantified amounts spent on portfolios to keep depreciation at those rates. Nor, to our knowledge, has its ideas been placed in the indirect investor context.

Details

Journal of Property Investment & Finance, vol. 26 no. 3
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 10 May 2011

Neil Crosby, Steven Devaney and Vicki Law

The paper addresses the practical problems which emerge when attempting to apply longitudinal approaches to the assessment of property depreciation using valuation‐based…

Abstract

Purpose

The paper addresses the practical problems which emerge when attempting to apply longitudinal approaches to the assessment of property depreciation using valuation‐based data. These problems relate to inconsistent valuation regimes and the difficulties in finding appropriate benchmarks.

Design/methodology/approach

The paper adopts a case study of seven major office locations around Europe and attempts to determine ten‐year rental value depreciation rates based on a longitudinal approach using IPD, CBRE and BNP Paribas datasets.

Findings

The depreciation rates range from a 5 per cent PA depreciation rate in Frankfurt to a 2 per cent appreciation rate in Stockholm. The results are discussed in the context of the difficulties in applying this method with inconsistent data.

Research limitations/implications

The paper has methodological implications for measuring property investment depreciation and provides an example of the problems in adopting theoretically sound approaches with inconsistent information.

Practical implications

Valuations play an important role in performance measurement and cross border investment decision making and, therefore, knowledge of inconsistency of valuation practice aids decision making and informs any application of valuation‐based data in the attainment of depreciation rates.

Originality/value

The paper provides new insights into the use of property market valuation data in a cross‐border context, insights that previously had been anecdotal and unproven in nature.

Details

Journal of European Real Estate Research, vol. 4 no. 1
Type: Research Article
ISSN: 1753-9269

Keywords

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