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Yield development in the real estate office market: The effect of obsolescence

Yield development in the real estate office market: The effect of obsolescence. Prof. Dr. Aart C. Hordijk MRICS H.H. Koerhuis-Gritter MSc. Contents. Why bother about obsolescence? Data Analysis Results Conclusions Suggestions for further research. Why bother about obsolescence?.

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Yield development in the real estate office market: The effect of obsolescence

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  1. Yield development in the real estate office market: The effect of obsolescence Prof. Dr. Aart C. Hordijk MRICS H.H. Koerhuis-GritterMSc.

  2. Contents • Why bother about obsolescence? • Data • Analysis • Results • Conclusions • Suggestions for further research

  3. Why bother about obsolescence? • Buildings grow old • Valuations: • GIY/NIY method  raise on initial yield • DCF method  exit value • Obsolescence hidden because of continuing sharpening of yields in rising markets • Change in market circumstances • Renovation or depreciation

  4. Data • ROZ/IPD Property index • 15 years of valuation data • Unique dataset offers research opportunities

  5. Analysis • 1 Reversionary yield vs exit yield (DCF Method) • 2 Yield in relation to year of construction • 3 Yield of properties 10 years in index vs market yield • 4 Market rent in relation to year of construction

  6. Explanations • Initial yield: Contract rent (excl vacancy) • Value of the property • Reversionary yield: Market rent (incl vacancy) • Value of the property • Exit yield: Market rent (excl vacancy) in year 11 • Value of the property in year 11

  7. Analysis 1: Method Reversionary yield vs exit yield (DCF Method) • 1995 – 2008 data • Reversionary yield instead of initial yield • 10 years DCF horizon • Difference between weigthed average RY and EY • Absolute and in percentage terms • Centre vs non-centre locations

  8. Analysis 1: Results • Average % difference 11.4% for a 10 years period (1.1% • per year) • Average absolute difference is 0.92 % point (0.09 % point • per year)

  9. Analysis 1: Results • Spread is less for offices on centre locations (0.82 % point) • than for offices on non-centre location (0.93 % point)

  10. Analysis 2: Method Yield in relation to year of construction • 1995 – 2008 data • Reversionary yield, weigthed average • Year of construction classes:

  11. Analysis 2: Results • On average a 10 year younger building had a 0.8% point • lower yield, which means 0.08% point per year

  12. Analysis 3: Method Held properties vs market yield • 1999 – 2008 data • 243 properties which have been in the ROZ/IPD Index for 10 years • Market yield as calculated by IPD • Difference absolute and in percentage terms

  13. Analysis 3: Results • The longer properties are in portfolio the more their • performance will stay behind the market performance • Obsolescence is on average 0.07% point per year • In percentage terms the difference 1% per year

  14. Analysis 4: Method Market rents per year of construction • Market rents per square meter from 2001 to 2008 • Year of construction classes as in analysis 2

  15. Analysis 4: Results • On average 16 euro decrease in market rent in 10 years • Average market rent is 130 euro, so 12% decrease in 10 years, which is around 1 percent per year

  16. Conclusions • Obsolescence in yield varies between 0.09, 0.08 and 0.07 percentage point per year as result from analysis 1, 2 and 3 (1% per year in percentage terms) • Obsolescence in rent around 1 percent per year in analysis 4 • In general obsolescence turns out to be higher than generally is expected

  17. Further research • Research is based on office figures from The Netherlands alone • Extention of the research to other countries is highly recommended

  18. Thank you! Contacts: • Prof. Dr. Aart C. Hordijk MRICS • University of Tilburg • a.c.hordijk@tiasnimbas.edu • Leonie Koerhuis-Gritter MSc. • IPD Netherlands • leonie.koerhuis@ipd.com

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