Modelling rental change across key retail investment markets in Britain. Valuation and measurement considerations
| Published date | 01 October 2004 |
| Pages | 354-385 |
| DOI | https://doi.org/10.1108/14635780410556861 |
| Date | 01 October 2004 |
| Author | Peter F. Colwell,Catherine Jackson |
| Subject Matter | Property management & built environment |
Modelling rental change across
key retail investment markets in
Britain
Valuation and measurement considerations
Peter F. Colwell
Department of Finance, College of Commerce and Business Administration,
University of Illinois at Urbana-Champaign, Champaign, Illinois, USA
Catherine Jackson
Cass Business School, City University, London, UK
Keywords Property management, Commercial centres, Rental value, Change management
Abstract Models of the commercial property market have become increasingly sophisticated in
recent years. However, the retail sector and, more specifically, analysis of retail markets at the local
level, have been comparatively neglected. This paper makes inroads into this gap in property
research. Retail rental change at the local level is explored, focusing on consumer expenditure as the
key determinant of change. The appropriateness of proxy variables is investigated and the
mechanisms of rental change are examined. This highlights issues and difficulties unique to local
level analysis. Following this, the relationship between rental change and underlying changes in
consumer expenditure is investigated. The stability of a panel model of rental change is examined,
with differences in market functioning identified across diverse groups of key local retail
investment markets. These differences highlight the re-emergence of northern markets during both
the economic decline and recovery phases of the last decade of the 20th century. Rental levels in
larger and smaller markets are also seen to respond to changes in consumer expenditure to
significantly different degrees, in periods of both decline and recovery.
1. Introduction
There are increasing calls to investigate the determinants of rental change in the
retail property sector (Brooks and Tsolacos, 2000; Hamelink et al., 2000). There are a
multitude of determinants of rental change, which can be divided into categories such
as property specific (for example, physical configuration, flexibility, condition and
micro-location), local specific (such as the characteristics and health of the local
economy and associated levels of, and changes in, demand and supply factors) and
national factors (such as the health of the national economy, including specific factors
such as interest and inflation rates and national planning guidance). This paper
focuses on retail rental change at the local level and seeks to advance the
understanding of the issues involved with modelling rental change across local retail
property markets in a number of ways. First, practicalities pertinent to modelling
local rental change, namely valuation and measurement considerations, are examined.
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
www.emeraldinsight.com/researchregister www.emeraldinsight.com/1463-578X.htm
The help and guidance of Michael White is gratefully acknowledged in the final stages of this
paper.
JPIF
22,5
354
Received March 2003
Accepted April 2004
Journal of Property Investment &
Finance
Vol. 22 No. 5, 2004
pp. 354-385
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780410556861
Secondly, spatio-temporal aspects of rental change across local markets are
examined.
To date, property literature has tended to focus on national and regional
macroeconomic indicators and past rental trends in explaining retail rental change.
There remain, however, gaps in both commercial property research and in our
understanding of the range of issues underpinning rental change. Further, the timing
and degree of change varies both temporally and spatially across local markets.
However, investigations should not be undertaken without understanding factors
affecting local rental change data. Ball and Grilli (1997), suggest that local level
analysis could be the way forward for property market modelling, but they
acknowledge associated difficult data issues.
This paper seeks to address data issues for local level modelling and, thus, presents
a discussion and exploration of the valuation and measurement considerations that are
inextricable from the development of models of local commercial property markets.
This is a comparatively under-researched area in the UK, primarily because of data
limitations. With studies predominantly using highly aggregated data, the way in
which rental change is determined and measured in each local market is diminished in
importance. These issues are, however, of crucial importance in the analysis and
modelling of local markets. While modelling and analysis of local markets is
comparatively neglected in the commercial property sector, lessons can be drawn from
areas of research outside commercial property, such as the study of residential
markets, macroeconomics and other related areas. Research themes in these areas
commonly differ in focus and, as such, each can provide support and comparative
examples for others for common problems.
With respect to the second area examined within this paper, in the retail sector,
consumer expenditure has been firmly established as a key demand side determinant
of rental change. Existing studies have predominantly examined the importance of
consumer expenditure (or proxy measures) using highly aggregated national and/or
regional data or a cross-section of local markets. These studies are useful in
establishing key factors in rental determination, but have been limited either by
investigation at the aggregate level or by lack of time series. This paper advances the
exploration of consumer expenditure as a determinant of rental change. Specifically, it
examines whether the importance of consumer expenditure in rental determination is
equal across markets and through time and, crucially, uses local level data for both
rental and expenditure variables.
Previous aggregate studies are fundamental in explaining and understanding the
operation of property markets, but the data can hide local specific issues and
relationships. As highlighted by Jackson (2002) and McNamara (1994), for example,
highly aggregated data not only hide city-specific factors, but also comprise highly
heterogeneous markets, limiting the meaningfulness of the results. As Ball and Grilli
(1997) comment, planning policies, institutional behaviour, market structure and
demand and supply relationships all vary across local markets and are all crucial to the
operation of those markets.
An empirical investigation that explores the relationship between rental
determination is presented in local markets and consumer expenditure. This
investigation represent s a significant advancement in t he analysis of rental
determination through the use of a pooled time series cross-section data set at the
Modelling rental
change
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local market level. The markets that are examined in the empirical section are the key
local retail investment markets in Britain, outside London. This study uses local
district data, representing a key move away from previous work that relied upon the
use of highly aggregated national and regional data, thus recognising the importance
of examining functional, rather than geographically grouped and aggregated, markets.
It also extends previous work at the local level, which has tended towards
cross-sectional analysis, by examining time-series data over the period 1989-2001 for
each local market. Previously, any time series analysis at the local level tended to focus
on single markets. The purpose of this section is not to test the significance of
consumer expenditure in rental determination per se, but rather to examine its
comparative importance across types of markets and also across different phases of the
property cycle. This is the key aim of the paper, in contrast to many existing models of
retail property markets, where such investigations have tended to be peripheral or
secondary.
The remainder of the paper is structured as follows. Sections 2 and 3 set out the
valuation and measurement considerations pertinent to local level analysis and
modelling. Section 2 examines the significance of consumer expenditure in retail
rental analysis and goes on to examine the relationship between expenditure levels
and underlying influences. Section 3 then examines how the structure and operation
of local property markets impacts rental determination and how this, in turn,
impacts the analysis of determinants of rental change. Section 4 then introduces
the data and methods used in the empirical investigation of the spatio-
temporal relationship between consumer expenditure and rental determination.
The results and discussion are presented in Section 5, while section 6 concludes the
paper.
2. The role of consumer expenditure in rental determination
Rental determination takes place in the user market, where demand side factors
interact with stock to determine rent. In the retail sector, demand from retailers for
property for occupation is largely derived from the demand from consumers for
goods and services from retail outlets. The consumer, aggregated to the retail
catchment area, determines retail revenue and retailers seek to capitalise on this
expenditure.
Testing this theory, empirical studies have established that consumer
expenditure is a key demand determinant in retail rental formation and change.
Studies have focused on a variety of areas, such as explaining UK rental le vels
using time-series and/or panel analysis at national and regional levels (Key et al.,
1994; Silver and Goode, 1990), changes in UK rental levels at national and regional
levels (Brooks and Tsolacos, 2000; Hendershott et al., 2002; Tsolacos, 1995), or
identifying rental determinants at the local level in the UK using cross-sectional
and/or panel analysis (Jackson, 2001; McGough and Tsolacos, 2001; Robertson and
Jones, 1999). The role of consumer expenditure has also been identified as a demand
side trigger in the development of new supply (Tsolacos, 1999; Whaley, 1990). In the
US, studies have tended to consider the importance of consumer expenditure and/or
underlying determinants to explain retail sales rather than rental change. See, for
example, Benjamin et al. (1996), Ingene and Yu (1981), Lachman and Brett (1996)
and Okoruwa et al. (1996)[1].
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