Affordability and performance in the industrial property market
| Date | 01 August 2005 |
| DOI | https://doi.org/10.1108/14635780510602390 |
| Published date | 01 August 2005 |
| Pages | 311-328 |
| Author | Sotiris Tsolacos,Tony McGough,Bob Thompson |
| Subject Matter | Property management & built environment |
Affordability and performance in
the industrial property market
Sotiris Tsolacos
Jones Lang LaSalle, London, UK
Tony McGough
Faculty of Finance, City University Business School, London, UK, and
Bob Thompson
RETRI Group, Upminster, UK
Abstract
Purpose – The aim of the present study is to assess the significance of cash flow and profitability
survey data in the modelling and forecasting of industrial rents. These data, taken from the British
Chambers of Commerce regional surveys of the manufacturing sector, are used as a partial proxy for
the affordability of industrial space occupiers. In the absence of direct profitability measures existing
studies approximate this information indirectly through output and to some extent employment
variables.
Design/methodology/approach – A cross-section time-series framework is deployed to model
regional industrial rents using a set of output and employment variables. The empirical model is
subsequently augmented with the inclusion of the cash flow and profitability measures.
Findings – Consistent with the findings of existing studies, changes in output are a significant
influence on the variation of real industrial rents. Supportive evidence for turnover and profitability is
found in four regions. In these regions cash flow variables contain additional information and improve
the forecast performance of the base model. The empirical findings also extend to obtaining estimates
after the BCC survey data are normalised with respect to the overall growth and the input costs
manufacturers face in each of the regions.
Originality/value – The present study extends existing work on industrial rents by introducing
more direct turnover and profitability series. Greater use of such series in property performance
forecasting over short-term horizons has the potential of resulting in smaller errors.
Keywords Profit,Industrial property,Leasing, Market economy,Financial forecasting,United Kingdom
Paper type Research paper
1. Introduction
The value of industrial real estate is primarily examined in relation to local economic
conditions, property location and physical characteristics. Empirical research has
attempted to identify optimum economic, location and property-specific variables to
capture more effectively the income producing potential of industrial properties. The
findings of such research are obtained through a number of specifications and
statistical techniques. The role of physical and location factors in determining the
value and return on industrial real estate is examined through cross sectional analysis
and in some studies with the estimation of panel data. Therefore, evidence on the
importance of physical characteristics such as size of contiguous leasable area, age,
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The authors are grateful to two anonymous reviewers for their insightful comments.
The industrial
property market
311
Received May 2004
Accepted December 2004
Journal of Property Investment &
Finance
Vol. 23 No. 4, 2005
pp. 311-328
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780510602390
office space content, dock doors, ceiling height and location attributes including
geographical location, closeness to airport, distance to a major route and CBD can be
found in several US studies (see for example Grissom et al., 1987; Ambrose, 1990;
Fehribach et al., 1993; Lockwood and Rutherford, 1996, Buttimer et al., 1997). Within
the cross-sectional frameworks, which quantify the effect of location and physical
characteristics, researchers examine other influences including economic variables
(local economy indicators) and hybrid variables (see Fehribach et al., 1993) such as type
of tenant.
Cross-sectional analysis provides useful insights on rent premia that properties
command in a specific geographical location and also on deriving estimates of the
depreciation rate (Salway, 1986; Baum, 1991). The thought process of an appraiser and
investor also requires a complementary analysis for the expected pattern of change in
rent and return at the local market or at the regional level. Researchers have deployed
time series and in particular econometric analysis to study the effect, mainly of
economic variables, on rents and returns with long historical data. A number of UK
studies fall into this category. The report by the RICS (1994) on UK commercial
property cycles presents models of industrial rental cycles in the UK as a whole and for
selected regions. Despite the appropriateness of the regression analysis for forecasting,
this study did not proceed with the production of forecasts. McGough and Tsolacos
(1995) explore the time-series characteristics of UK industrial rents and forecast ren ts
with ARIMA models. Thompson and Tsolacos (1999) evaluated the forecast
performance of regression models and used the models for out of sample (ex ante)
forecasts. In another study, these authors (Thompson and Tsolacos, 2000) forecast
industrial rents through a three-equation simultaneous model of the property market
as a whole. Regression analysis has also enabled researchers to study the effect of other
variables, for example Thompson and Tsolacos (2001) look at the effect of industrial
land values on industrial rents in local markets.
Although the findings of the statistical analysis contribute to the set of information
available to appraisers, investors and developers, other methodologies are also
important as they provide a micro-level of analysis using information about both the
local economy and market conditions. Examples in the literature include the demand
for industrial space models in the study of Rabianski and Black (1997) and t he detailed
account of factors affecting industrial demand that Hughes (1994) presented with
respect to inputs of industrial activity and constraints on industrial output. Anot her
example is a UK-wide survey carried out by Thompson (1997) to obtain estimates of
trends in floorspace-to-employment densities for a range of industrial building types
including factories (where manufacturing is the main use) and mixed-use
factory/warehouses.
What the rent industrial occupiers are willing to pay and afford depends on the
profitability of their businesses (net of operating costs). This holds for industrial
occupiers with properties falling across the whole spectrum of physical and location
characteristics. The other factor, of course to consider along with affordability, is the
availability of space in the local market or other markets depending on how mobile the
occupier firm is. In a tight market and in a market context where supply of industrial
land has been under threat by other competing uses, for example in the UK,
affordability becomes a crucial determinant factor of rental growth. Existing studies,
both those using time-series data and cross sectional data, employ economic variable s
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