19-Jun-2010
Yield development in the real estate office market: The effect of obsolescence
Prof. Dr. Aart C. Hordijk MRICSH.H. Koerhuis-Gritter MSc.
19-Jun-2010 2
Contents
•Why bother about obsolescence?
•Data
•Analysis
•Results
•Conclusions
•Suggestions for further research
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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
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Data
•ROZ/IPD Property index
•15 years of valuation data
•Unique dataset offers research opportunities
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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
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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
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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
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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)
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
Absolute difference RY - EY
Absolute difference RY-EY
Average absolute difference RY-EY
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Analysis 1: Results
• Spread is less for offices on centre locations (0.82 % point) than for offices on non-centre location (0.93 % point)
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Spread RY - EY
Centre
Non-centre
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Analysis 2: Method
Yield in relation to year of construction
•1995 – 2008 data
•Reversionary yield, weigthed average
•Year of construction classes: < 1985
1985 – 1989
1990 – 1994
1995 - 1999
2000 - 2004
> 2004
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Analysis 2: Results
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
RY per year, per year of construction
2001
2002
2003
2004
2005
2006
2007
2008
• On average a 10 year younger building had a 0.8% point lower yield, which means 0.08% point per year
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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
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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
-0,40
-0,30
-0,20
-0,10
0,00
0,10
0,20
0,30
0,40
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
RY held properties - RY market
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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
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Analysis 4: Results
100
110
120
130
140
150
160
170
2001
2002
2003
2004
2005
2006
2007
2008
Class Year of construction
Average market rent (€)
1 1985 - 1989 121 2 1990 - 1995 129 3 1995 - 2000 141 4 2000 - 2004 142
• 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
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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
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Further research
•Research is based on office figures from The
Netherlands alone
•Extention of the research to other countries is
highly recommended
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Thank you!
Contacts:
•Prof. Dr. Aart C. Hordijk MRICS•University of Tilburg•[email protected]
•Leonie Koerhuis-Gritter MSc.•IPD Netherlands•[email protected]