International Financial Centres, Office Market Rents and Volatility

Despite continuing developments in information technology and the growing economic significance of the emerging Eastern European, South American and Asian economies, international financial activity remains strongly concentrated in a relatively small number of international financial centres. That concentration of financial activity requires a critical mass of office occupation and creates demand for high specification, high cost space. The demand for that space is increasingly linked to the fortunes of global capital markets. That linkage has been emphasised by developments in real estate markets, notably the development of global real estate investment, innovation in property investment vehicles and the growth of debt securitisation. The resultant interlinking of occupier, asset, debt and development markets within and across global financial centres is a source of potential volatility and risk. The paper sets out a broad conceptual model of the linkages and their implications for systemic market risk and presents preliminary empirical results that provide support for the model proposed.international financial centres, office markets, systemic risk, ownership

Real Estate Investment in Global Financial Centers: Risk, Return and Contagion

Global financial activity is heavily concentrated in a small number of world cities –international financial centers. The office markets in those cities receive significant flows of investment capital. The growing specialization of activity in IFCs and innovations in real estate investment vehicles lock developer, occupier, investment, and finance markets together, creating common patterns of movement and transmitting shocks from one office market throughout the system. International real estate investment strategies that fail to recognize this common source of volatility and risk may fail to deliver the diversification benefits sought.

Real estate capital flows and transitional economies

reign real estate capital was a major source of financing domestic property market office construction in Central Europe after the fall of the Berlin Wall in 1989. During the 1990s, over 800 office buildings were either newly constructed or refurbished in Budapest, Prague and Warsaw. The primary focus of this analysis is explaining the spatial construction and redevelopment patterns of the post-1989 office buildings in these cities. Secondarily, we analyze the correlation of foreign direct investment flows to annual construction of office buildings. We seek to explain the location of new or refurbished office buildings in the central business district (CBD) or in non-CBD locations in terms of the effect of time, size of property and other variables, and test whether there is a positive correlation relationship of foreign direct investment flows and new office construction or refurbishment. Integrating relevant foreign direct investment (FDI), economic geography and property theories in the research, the authors attempt to bridge existing gaps in the literature

“Financial alchemy” or a zero sum game? Real estate finance, securitisation and the UK property market

Following the US model, the UK has seen considerable innovation in the funding, finance and procurement of real estate in the last decade. In the growing CMBS market asset backed securitisations have included $2.25billion secured on the Broadgate office development and issues secured on Canary Wharf and the Trafford Centre regional mall. Major occupiers (retailer Sainsbury’s, retail bank Abbey National) have engaged in innovative sale & leaseback and outsourcing schemes. Strong claims are made concerning the benefits of such schemes – e.g. British Land were reported to have reduced their weighted cost of debt by 150bp as a result of the Broadgate issue. The paper reports preliminary findings from a project funded by the Corporation of London and the RICS Research Foundation examining a number of innovative schemes to identify, within a formal finance framework, sources of added value and hidden costs. The analysis indicates that many of the gains claimed conceal costs – in terms of market value of debt or flexibility of management – while others result from unusual firm or market conditions (for example utilising the UK long lease and the unusual shape of the yield curve). Nonetheless, there are real gains resulting from the innovations, reflecting arbitrage and institutional constraints in the direct (private) real estate marke

Asset allocation, cross-class correlation and the structure of property returns

Practical applications of portfolio optimisation tend to proceed on a “top down” basis where funds are allocated first at asset class level (between, say, bonds, cash, equities and real estate) and then, progressively, at sub-class level (within property to sectors, office, retail, industrial for example). While there are organisational benefits from such an approach, it can potentially lead to sub-optimal allocations when compared to a “global” or “side-by-side” optimisation. This will occur where there are correlations between sub-classes across the asset divide that are masked in aggregation – between, for instance, City offices and the performance of financial services stocks. This paper explores such sub-class linkages using UK monthly stock and property data. Exploratory analysis using clustering procedures and factor analysis suggests that property performance and equity performance are distinctive: there is little persuasive evidence of contemporaneous or lagged sub-class linkages. Formal tests of the equivalence of optimised portfolios using top-down and global approaches failed to demonstrate significant differences, whether or not allocations were constrained. While the results may be a function of measurement of market returns, it is those returns that are used to assess fund performance. Accordingly, the treatment of real estate as a distinct asset class with diversification potential seems justified

Friction and inertia: business change, corporate real estate portfolios and the UK office market

It has been asserted that business reorganisation and new working practices are transforming the nature of demand for business space. Downsizing, delayering, business process reengineering and associated initiatives alter the amount, type and location of space required by firms. The literature has neglected the impact of real estate market structures on the ability of organisations to successfully implement these new organisational forms or contemporary working practices. Drawing from UK research, the paper demonstrates that, while new working practices are widespread, their impact on the corporate real estate portfolio is less dramatic than often supposed. In part, this is attributed to inflexibility in market structures which constrains the supply of appropriate space

Change & flexibility: the role of serviced office space in corporate real estate portfolios and office markets

With the increasing pace of change, organisations have sought new real estate solutions which provide greater flexibility. What appears to be required is not flexibility for all uses but appropriate flexibility for the volatile, risky and temporal part of a business. This is the essence of the idea behind the split between the core and periphery portfolio. The serviced office has emerged to fill the need for absolute flexibility. This market is very diverse in terms of the product, services and target market. It has grown and gained credibility with occupiers and more recently with the property investment market. Occupiers similarly use this space in a variety of ways. Some solely occupy serviced space while others use it to complement their more permanent space. It therefore appears that the market is fulfilling the role of providing periphery space for at least some of the occupiers. In all instances the key to this space is a focus on financial and tenurial flexibility which is not provided by other types of business space offered

Commercial real estate return distributions: a review of literature and empirical evidence

This paper review the literature on the distribution of commercial real estate returns. There is growing evidence that the assumption of normality in returns is not safe. Distributions are found to be peaked, fat-tailed and, tentatively, skewed. There is some evidence of compound distributions and non-linearity. Public traded real estate assets (such as property company or REIT shares) behave in a fashion more similar to other common stocks. However, as in equity markets, it would be unwise to assume normality uncritically. Empirical evidence for UK real estate markets is obtained by applying distribution fitting routines to IPD Monthly Index data for the aggregate index and selected sub-sectors. It is clear that normality is rejected in most cases. It is often argued that observed differences in real estate returns are a measurement issue resulting from appraiser behaviour. However, unsmoothing the series does not assist in modelling returns. A large proportion of returns are close to zero. This would be characteristic of a thinly-traded market where new information arrives infrequently. Analysis of quarterly data suggests that, over longer trading periods, return distributions may conform more closely to those found in other asset markets. These results have implications for the formulation and implementation of a multi-asset portfolio allocation strategy

Real Estate Capital Flows and Transitional Economies

Foreign real estate capital was a major source of financing domestic property market office construction in Central Europe after the fall of the Berlin Wall in 1989.  During the 1990s, over 800 office buildings were either newly constructed or refurbished in Budapest, Prague and Warsaw.  The primary focus of this analysis is explaining the spatial construction and redevelopment patterns of the post-1989 office buildings in these cities.  Secondarily, we analyze the correlation of foreign direct investment flows to annual construction of office buildings.  We seek to explain the location of new or refurbished office buildings in the central business district (CBD) or in non-CBD locations in terms of the effect of time, size of property and other variables, and test whether there is a positive correlation relationship of foreign direct investment flows and new office construction or refurbishment. Integrating relevant foreign direct investment (FDI), economic geography and property theories in the research, the authors attempt to bridge existing gaps in the literature.Transitional Economies, Office Construction, Foreign Direct Investment, Capital Flows

Individual Assets, Market Structure And The Drivers Of Return

Much prior research on the structure and performance of UK real estate portfolios has relied on aggregated measures for sector and region. For these groupings to have validity, the performance of individual properties within each group should be similar. This paper analyses a sample of 1,200 properties using multiple discriminant analysis and cluster analysis techniques. It is shown that conventional property type and spatial classifications do not capture the variation in return behaviour at the individual building level. The major feature is heterogeneity - but there may be distinctions between growth and income properties and between single and multi-let properties that could help refine portfolio structures.Portfolio Structure, Return Generation Process, Real Estate