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Modelling Effective Office Rents by Matt Hall DTZ, 125 Old Broad Street, London, EC2N 2BQ

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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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Presentation Transcript
slide1

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]
slide2

Introduction

  • Introduction
  • Data calculation
  • Models
  • Results
slide3

Introduction

Issue

  • Prime office rents are often questioned for lack of responsiveness to market pressures
slide4

Introduction

Prime office rents

slide5

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
slide6

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
slide7

Introduction

Prime and effective office rents in London City

Source: DTZ Research

slide8

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

slide9

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
slide10

Models

London City

Source :DTZ Research

brussels office markets

Results

Brussels Office markets

Source :DTZ Research

slide13

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
slide14

Conclusions

Madrid Office markets

Source :DTZ Research

slide15

Conclusions

Manchester Office markets

Source :DTZ Research

slide16

Conclusions

Manchester Office markets

Source :DTZ Research

slide17

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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