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Modelling Effective Office Rents by Matt Hall DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 3011 Email: matthew.hall@dtz.com & Tony McGough DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 2314 Email: tony.mcgough@dtz.com. Introduction. Introduction
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Modelling Effective Office Rents • by • Matt Hall • DTZ, 125 Old Broad Street, London, EC2N 2BQ • Tel: +44 (0)20 3296 3011 Email: matthew.hall@dtz.com • & • Tony McGough • DTZ, 125 Old Broad Street, London, EC2N 2BQ • Tel: +44 (0)20 3296 2314 Email: tony.mcgough@dtz.com
Introduction • Introduction • Data calculation • Models • Results
Introduction Issue • Prime office rents are often questioned for lack of responsiveness to market pressures
Introduction Prime office rents
Introduction Issue • Prime office rents are often questioned for lack of responsiveness to market pressures • Some reasons • Smaller markets struggle to get evidence of declines • Less active market especially in quiet times • But see some example of this even in London • Asymmetric Properties of rental movement (Hendershott et al)2008 • Definitely something there but a quantifiable known is effective rents
Introduction Effective rents • Incentives are used to hold up rents in downturns • It is in landlord’s interests to maintain headline rents • Supports capital value and provides a market floor • Provides a lock in value for developers • Market evidence used in rent reviews • Especially with upward only rent reviews • Impact and how to treat incentives for investment returns well documented (Brown) 1995
Introduction Prime and effective office rents in London City Source: DTZ Research
Data Collection • Need to standardise approach Take account of standards – UK 3 month always free for fit out – Other markets in ‘turn key’ condition – No rent frees beyond first break (5 years in UK 3 years in Italy) • Standardise lease lengths at 10 years – No rent frees beyond first break (5 years in UK 3 • Calculate effective rent (((Lease length – (rent free period-fit out allowance))/lease length)*prime rent
Models • From this we calculate an implicit rent series of rent free months and model this • Other variables used • Availability • Stock • Main driver of prime rent – not the rent itself • Lagged incentive
Models London City Source :DTZ Research
Results Paris IDF Office markets Source :DTZ Research
Results Brussels Office markets Source :DTZ Research
Conclusions • Rents are similarly volatile at effective rents level • Some markets (UK) have used incentives a long time but other markets (Belgium) are using them more – particularly in difficult conditions • Some markets (Madrid) do not use incentives and thus appear more volatile
Conclusions Madrid Office markets Source :DTZ Research
Conclusions Manchester Office markets Source :DTZ Research
Conclusions Manchester Office markets Source :DTZ Research
Conclusions • Rents are similarly volatile at effective rents level • Some markets (UK) have used incentives a long time but other markets (Belgium) are using them more – particularly in difficult conditions • Some markets (Madrid) do not use incentives and thus appear more volatile • Incentives are being increasingly used and this trend will continue