The Implicit Pricing of Property Attributes
Investment theory dictates that freehold capitalisation rates are determined by the risk free nominal rate of return plus the risk premium less the expected growth rate plus an allowance for depreciation. In practice, capitalisation rates are often determined as a single figure from recent comparable transactions, with adjustments reflecting growth potential and risk attached to returns. While these two approaches are recognised internationally, research has yet to explicitly break down capitalisation rates into their component parts to determine investors’ pricing of growth and risk. More particularly, the risk premium has received only scant attention at a conceptual level, with no attempt made to explicitly quantify its multiple components.
Here, we set out a comprehensive conceptual model of the capitalisation rate and then empirically quantify its component drivers using a spatially robust cross-sectional inter-temporal multi-level model. This is achieved using previously unavailable micro-level transaction data on the London office markets, over the period 2010Q2-2012Q3, made available to the study by CoStar, augmented by growth rates provided by CBRE and further details from EGi.
The results provide insights into the pricing of real estate assets by investors and are compared for international-based and UK-based investors, the former comprising over half of the sample. They reveal that, at the individual stock level, term to expiry, building quality and tenant covenant drive yield determination while, at the market level, historic rental growth rates are important.
The final stage of the study examines differences across investor groups and explores the inflationary effect of international investment on the London markets.
- Prof N Crosby (School of Real Estate and Planning, University of Reading)
- Dr C Jackson (Department of Town and Regional Planning, University of Sheffield)
- Dr A M Orr (Urban Studies, School of Social and Political Science, University of Glasgow)
November 2012 - July 2014
RICS Education Trust
Crosby, N., Jackson, C. and Orr, A. (2014) The Implicit Pricing of Property Attributes, Paper presented at 2014 International AREUEA Conference, University of Reading, July 2014.
Crosby, N., Jackson, C. and Orr, A. (2013) The Implicit Pricing of Property Attributes: an ongoing study, Paper presented at European Real Estate Society Conference, Vienna, July 2013.”