Yield development in the real estate
office market: The effect of obsolescence
Prof. Dr. Aart C. Hordijk MRICS
H.H. Koerhuis-Gritter MSc.
19-Jun-2010
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
Absolute difference RY - EY
1,4
1,2
1,0
0,8
Absolute difference
RY-EY
0,6
0,4
Average absolute
difference RY-EY
0,2
0,0
• 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)
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Analysis 1: Results
Spread RY - EY
1,4
1,2
1,0
0,8
0,6
Centre
0,4
Non-centre
0,2
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0,0
• Spread is less for offices on centre locations (0.82 % point)
than for offices on non-centre location (0.93 % point)
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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
RY per year, per year of construction
9.0%
8.5%
8.0%
2001
2002
7.5%
2003
2004
7.0%
6.5%
6.0%
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
RY held properties - RY market
0,40
0,30
0,20
0,10
0,00
-0,10
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-0,20
-0,30
-0,40
• 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
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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
170
160
150
140
130
2001
2002
2003
2004
120
2005
110
2006
100
Class
1
2
3
4
Year of
construction
1985 - 1989
1990 - 1995
1995 - 2000
2000 - 2004
Average market
rent (€)
121
129
141
142
2007
2008
• 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
• a.c.hordijk@tiasnimbas.edu
• Leonie Koerhuis-Gritter MSc.
• IPD Netherlands
• leonie.koerhuis@ipd.com
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