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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. ‘Derived’ demand sectors.
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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
‘Derived’ demand sectors • Development • Occupation • Investment
Geography • International • Regional • City-regions • Towns and cities • In-town / out-of-town • Neighbourhoods • Streets
Uses Commercial Retail Shopping centres Standard units Retail warehouses Outlets Department stores supermarkets Offices Business parks blocks • Residential • Owner-occupied • Private rented • Affordable • Industrial • Factories • Warehouses • Standard • Distribution • Data • Other • Leisure • Etc.
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
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
…and conversions-prime/secondary Offices – city centre prime…
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
Heavyindustrialmanufacturing Lightindustrialtrading estate
Warehousingtrading estate Office / warehouse out of town
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
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 • Merchant developers • Investor developers • Owner occupiers
Vacancy (shops) End of Year Report 2009: Dawn of a better market! 10th February 2010 Local Data Company
Key indicators: demand andmarket clearing Occupiers • Prices • Rents and lease terms • Care over rent definitions: asking, headline, effective • Rate of change in rents and prices over time Investors • Prices (capital values) • Yields 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) • Occupiers • Tenants • Owner occupiers • Investors • Institutions • Overseas • Private
Development • Supply side variable • Supply pipeline (by sector and graded according to quality) • 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’ • Consider • Appropriate spatial scale • Probability of completion • Net addition to supply (i.e. deduct demolitions and conversions) • Refurbishments
Land market • Land prices – market clearing or equilibrium variable • VOA Property Market Report: live link
NON-DOMESTIC - Stock Total floorspace of commercial and industrial propertiesin England and Wales = 596m sqm
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)
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
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
Influences on propertyinvestment returns and yields • Main variables affecting property yields: • Rents • Inflation • Interest rates • Bond yields • institutional investment in property • company productivity • Main variables affecting all property returns: • Supply of floorspace in relevant sector • Inflation • Exchange rate • Interest rates
Influences on propertyinvestment 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
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