Property market indices and lease structures – the impact on investment return delivery in the UK and Germany: Part I
| Date | 01 April 2001 |
| DOI | https://doi.org/10.1108/14635780110383712 |
| Pages | 175-194 |
| Published date | 01 April 2001 |
| Author | Neil Turner,Matthias Thomas |
| Subject Matter | Property management & built environment |
Academic papers:
Investment
return
175
Journal of Property Investment &
Finance, Vol. 19 No. 2, 2001,
pp. 175-187. #MCB University
Press, 1463-578X
Received August 2000
Revised October 2000
ACADEMIC PAPERS
Property market indices and
lease structures ± the impact
on investment return delivery
in the UK and Germany: Part I
Neil Turner
Alecta Investment Management,
London, UK, and
Matthias Thomas
DID, Wiesbaden, Germany
Keywords Property, Lease, Investment property, United Kingdom, Germany
Abstract The lack of portfolio-based property indices in European property markets has led
researchers to consider the use of notional property indices to determine the risk and return
rewards of investing in these markets. Owing to the computation assumptions underlying
notional indices, in particular their inability to capture the prevalent lease structure in a market,
they are unsuitable for this purpose, and investors devising European investment strategies
around them need to be wary. This paper demonstrates the differences in property investment
return delivery between notional and portfolio-based indices, concentrating particularly on lease
structures, and utilises data from the UK for this purpose. German lease structures are then
considered in this context.
Introduction
This is the first of two papers which aim to contribute to the very thin body of
literature which exists in respect of the analysis of the differences in investment
return delivery produced by ``notional'' and ``portfolio-based'' property indices in
Europe. The paper argues that one of the principal differences between notional
and portfolio-based indices is the factthat the former type of index fails to reflect
the reality thatthe capital value growth of a propertyportfolio is regulated by the
lease structures governing it. Owing to their computation procedures, notional
property indices instantaneously transfer market rent and yield movements into
capital value movements. By comparison, the lease contracts governing
properties which make up a portfolio-based index modulate the relationship
between the marketrent and yield movements andchanges in capital value.
These differences should be of great interest to the international property
investment community. If there is substantial divergence between the two
types of index in terms of absolute levels of returns and volatility of returns,
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The authors would like to thank Tony Key and Mark Callendar at IPD and Andy Schofield at
Henderson Global Investors for their comments on earlier drafts of this paper.
Alecta Investment Management was formerly SPP Investment Management.
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