Modelling Effective Office Rents
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Modelling Effective Office Rents by Matt Hall DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 3011 Email: [email protected] & Tony McGough DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 2314 Email: [email protected] Introduction. Introduction

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  • Modelling Effective Office Rents

  • by

  • Matt Hall

  • DTZ, 125 Old Broad Street, London, EC2N 2BQ

  • Tel: +44 (0)20 3296 3011 Email: [email protected]

  • &

  • Tony McGough

  • DTZ, 125 Old Broad Street, London, EC2N 2BQ

  • Tel: +44 (0)20 3296 2314 Email: [email protected]


Introduction

  • Introduction

  • Data calculation

  • Models

  • Results


Introduction

Issue

  • Prime office rents are often questioned for lack of responsiveness to market pressures


Introduction

Prime office rents


Introduction

Issue

  • Prime office rents are often questioned for lack of responsiveness to market pressures

  • Some reasons

  • Smaller markets struggle to get evidence of declines

    • Less active market especially in quiet times

    • But see some example of this even in London

  • Asymmetric Properties of rental movement (Hendershott et al)2008

  • Definitely something there but a quantifiable known is effective rents


  • Introduction

    Effective rents

    • Incentives are used to hold up rents in downturns

    • It is in landlord’s interests to maintain headline rents

      • Supports capital value and provides a market floor

      • Provides a lock in value for developers

      • Market evidence used in rent reviews

      • Especially with upward only rent reviews

    • Impact and how to treat incentives for investment returns well documented (Brown) 1995


    Introduction

    Prime and effective office rents in London City

    Source: DTZ Research


    Data Collection

    • Need to standardise approach

      Take account of standards

      – UK 3 month always free for fit out

      – Other markets in ‘turn key’ condition

      – No rent frees beyond first break (5 years in UK 3 years in Italy)

    • Standardise lease lengths at 10 years

      – No rent frees beyond first break (5 years in UK 3

    • Calculate effective rent

      (((Lease length – (rent free period-fit out allowance))/lease length)*prime rent


    Models

    • From this we calculate an implicit rent series of rent free months and model this

    • Other variables used

    • Availability

    • Stock

    • Main driver of prime rent – not the rent itself

    • Lagged incentive


    Models

    London City

    Source :DTZ Research


    Paris idf office markets

    Results

    Paris IDF Office markets

    Source :DTZ Research


    Brussels office markets

    Results

    Brussels Office markets

    Source :DTZ Research


    Conclusions

    • Rents are similarly volatile at effective rents level

    • Some markets (UK) have used incentives a long time but other markets (Belgium) are using them more – particularly in difficult conditions

    • Some markets (Madrid) do not use incentives and thus appear more volatile


    Conclusions

    Madrid Office markets

    Source :DTZ Research


    Conclusions

    Manchester Office markets

    Source :DTZ Research


    Conclusions

    Manchester Office markets

    Source :DTZ Research


    Conclusions

    • Rents are similarly volatile at effective rents level

    • Some markets (UK) have used incentives a long time but other markets (Belgium) are using them more – particularly in difficult conditions

    • Some markets (Madrid) do not use incentives and thus appear more volatile

    • Incentives are being increasingly used and this trend will continue


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