Estimating the value, ownership structure and turnover rate for investible commercial real estate from transaction datasets
| Published date | 10 November 2020 |
| Date | 10 November 2020 |
| Pages | 366-382 |
| DOI | https://doi.org/10.1108/JPIF-05-2020-0052 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Steven Devaney,David Scofield |
Estimating the value, ownership
structure and turnover rate for
investible commercial real estate
from transaction datasets
Steven Devaney
Real Estate and Planning, Henley Business School, University of Reading,
Reading, UK, and
David Scofield
Department of Real Estate, Ted Rogers School of Management, Ryerson University,
Toronto, Canada
Abstract
Purpose –Commercial real estate (CRE) is a major investment asset. Yet detailed information on the value of
investible CRE in different cities is lacking. The authors propose an innovative method to measure the value of
investible CRE using transaction datasets.
Design/methodology/approach –The authors take transaction prices and index them to produce a time
series of values for each asset. The sum of the values at each point represents the value of investible CRE at that
date. The authors’method is applied to transaction data for New York, London and Toronto.
Findings –London had the highest proportions of institutional and foreign ownership, and its turnover was
more resilient to the downturn in global CRE following the GFC. The results illustrate the potential of the
authors’method to shed light on the characteristics of investible CRE markets.
Research limitations/implications –The authors use data from Real Capital Analytics (RCA). This
provides good coverage of transactions for investible CRE in the cities that the authors examine, but data from
other sources might lead to different estimates.
Practical implications –Measuring the value and turnover of investible CRE is important for portfolio
strategies that account for the size and liquidity of investment markets. Knowledge of these features, and of
ownership patterns, provides a better understanding of market operation.
Originality/value –The authors’modification of the perpetual inventory technique is simple, novel and
practical. The authors propose this approach given the absence of a building-by-building inventory of
investible CRE in many markets.
Keywords Market size, Ownership, Stock, Transactions, Turnover
Paper type Research paper
1. Introduction
Commercial real estate (CRE) is a key factor of production in many industries and a major
investment asset. As such, it makes an important contribution to the economy and is a
significant component of national wealth. Yet detailed information on the value of CRE of
different types in different locations is lacking. Knowledge of the value of CREis especially
important in the context of portfolio allocation –both to private real estate as an asset class
and to specific sectors or regions (Mahoney et al., 2000;Florance et al., 2010). However, only
certain types of CRE are typically considered investible by most professional investors
(Key and Law, 2005), with traditional targets for investment capital being retail premises,
offices and light industrial/warehouse properties as well as multifamily residential assets in
JPIF
39,4
366
The authors thank Real Capital Analytics for the provision of data required to undertake this study.
They thank the anonymous reviewers and the participants at both the 2018 REALPAC/Ryerson
symposium and the 2019 American Real Estate Society meeting for comments and feedback.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 8 May 2020
Revised 9 August 2020
22 October 2020
Accepted 26 October 2020
Journal of Property Investment &
Finance
Vol. 39 No. 4, 2021
pp. 366-382
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-05-2020-0052
some nations. This has stimulated research interest in both the value of the total non-
residential real estate stock and the value of the investible stock, the latter being the focus of
this paper.
The scale of investible real estate markets, together with the types of investors holding
assets in those markets, is likely to have implications for liquidity and market operation
(Baum and Lizieri, 1999;Devaney et al., 2017). Liquidity is difficult to capture using a single
measure, as it relates to the cost, speed and impact of trading activity, but the amount of
trading should reflect the ease of trading and so signal those markets and periods where
liquidity is greater. The cash volume of trading is commonly noted in CRE market reports, yet
cash volumes are influenced not only by market activity but also by trends in prices. For this
reason, Devaney et al. (2017) advocate analysis of turnover rates since these scale transaction
volumes to market size, but, consequently, this requires robust estimates of the value of CRE
markets to be made (IPF, 2004).
The value and turnover of CRE markets will reflect economic factors and institutional
attributes. Larger and more active real estate markets are likely to attract more professional
investment, including cross-border investment that, in turn, may have positive effects on
activity, transparency and overall value. Devaney et al. (2017) show a positive relationship
between institutional investment flows and market size for US office markets. However,
flows to secure entry to (or exit from) markets do not indicate the longer-term effects of
changes in ownership. Lizieri and Mekic (2018) contend that change in the nature of
ownership might lead to reduced activity if investors entering a market have different
horizons and objectives to those that are divesting of stock. Hence, there is a strong case for
measuring both activity and ownership within investible CRE markets to understand the
impact of these factors on performance and liquidity and the potential implications for
portfolio strategies.
Despite this, estimates for the value of CRE stock by type and location are not readily
available for most real estate investment markets. In the USA, many researchers have
commented on this. Thirty years ago, Fisher and Webb (1992) noted the lack of robust data
regarding the value of CRE, with estimates for the USA in the late 1980s and early 1990s
ranging from $800 billion to $5 trillion (see also Miles, 1990). More recently, Silver and Graff
(2014) have observed that determining the total value of different types of CRE across US
markets is still a vexed issue. We argue that developing better, more systematic methods for
tracking the value of CRE over time is an important research area where more attention is
long overdue. This includes methods that lead to the development of new datasets and
methods that exploit existing data sources to their maximum potential.
In this context, we propose a simple, yet effective, method for constructing estimates of the
value and turnover of the investible CRE stock in different locations. This method involves
building up a profile of the stock from records of assets that have transacted, and it is
proposed in the absence of a building-by-building inventory in many metro areas. No single
source of transaction information offers perfect coverage, but we apply our method to data
from Real Capital Analytics (RCA) for New York, London and Toronto, three prominent CRE
markets located within major financial centres. Although there has been prior research on
market size and ownership for London CRE, reviewed further, we include this city in our
analysis to benchmark our results against previous studies. Given a sufficiently large dataset
of transactions in terms of time period and coverage, our approach should be effective in
estimating the value of investible CRE.
The next section of the paper discusses previous attempts to quantify the value and
turnover of CRE in the USA and elsewhere. The following section then sets out our method
and discusses the transaction data that we use to illustrate our approach. The fourth
section discusses the results for our sample of CRE markets, and a final section then
concludes.
Value,
ownership
structure and
turnover rate
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