1) Index Construction and Property Market Transparency
Submitting Institution
University of AberdeenUnit of Assessment
Architecture, Built Environment and PlanningSummary Impact Type
EconomicResearch Subject Area(s)
Economics: Economic Theory, Applied Economics, Econometrics
Summary of the impact
Property market investors (from large institutional investors to
potential home buyers) need to have
confidence on the level of risk and returns associated with their
transactions. Without such
confidence, property markets will fail to operate efficiently.
This case study reports on the development of a number of different
property indices by Aberdeen-based
researchers which have increased information on, and therefore the
transparency of,
specific markets. The commercial real estate and urban regeneration
indices have been widely
adopted by industry and influence investment portfolio decisions. The
residential indices are used
by surveyors, mortgage lenders and influence the housing choices of the
general public.
Underpinning research
Transaction-based commercial property indices
Commercial property performance indices have historically been based on
appraisals, with valuers
combining a range of past and current information to reach an estimate of
value. Research by
MacGregor (Aberdeen) with international collaborators [Ref 1]
explains how the results of this
approach are problematic.
Recognising the limitations of appraisal-based indices, in 2008 the
Investment Property Databank
(IPD) funded Devaney (while based at Aberdeen) to produce a
complementary transaction-based
index for the UK commercial property market using data held by the company
as part of their
primary business (property performance measurement). Using econometric
methods, the first
value-weighted indices of the UK commercial real estate market were
derived. These revealed
stronger growth in prices in the run up to the peak of the UK market in
2007 than suggested by
appraisal-based indices. They also showed that returns are more volatile
and less autocorrelated
than previously suggested. The findings have been published in the form of
an academic paper
[Ref 2] and a consultation report, disseminated throughout the real estate
industry (see section 4).
Urban Regeneration Property Performance Index
In 2003 Hutchison (Aberdeen) with colleagues from the Universities
of Ulster and Glasgow
completed a major ESRC, RICS and ODPM funded project on the investment
performance of
property in regeneration areas [Ref 3]. Prior to this, there was
relatively little knowledge on the
performance of properties in regeneration areas with most indices
focussing instead on prime
markets. The research showed that rental growth was similar for
regeneration properties compared
to the prime market but highlighted a higher yield in the short to medium
term. Once a regeneration
area becomes established and rental growth emerges, investor interest is
stimulated resulting in
increased competition and a shortening of yields. The research led to,
amongst other things, the
establishment of a new urban regeneration property performance index which
was published on
annual basis from 2005 to 2011 by IPD and Savills (see section 4).
Local and national house price indices
Most developed economies have at least one national house price index
indicating house price
movements over time. The indices vary in terms of how they are
constructed. In this context,
Hoesli (employed on a partial contract at Aberdeen throughout the
REF period) conducted a series
of research projects with international collaborators on the alternative
methods of house price
index construction [see, for example, Ref 4]. Findings showed that list
price indices (such as the
index employed exclusively by the Swiss National Bank until 2008) can
exhibit a different price
path compared to hedonic indices which control for the quality of
properties. In particular, list price
indices appear to overstate price changes in booming housing markets and
understate price
movements in declining markets. As a result of the research, the Swiss
National Bank has chosen
to supplement its list price index with an hedonic index. The same hedonic
index has recently been
made available on the Swiss stock exchange (see section 4).
The development of sub-national house price indices is typically
constrained by data limitations
although the potential utility of such indices is clear. Researchers based
at Aberdeen (Owusu-Ansah,
Roberts, Schulz and Wersing) in collaboration with the
Aberdeen Solicitor's Property
Centre (ASPC) have developed a quality-controlled (hedonic) Aberdeen house
price index. The
index, launched in summer 2012, has replaced the information previously
made available by the
ASPC and Aberdeen City Council on house price movements in the region.
Underlying research in
this case has focussed on the extent to which practical issues (such as
selection of attributes for
the "standard" house, choice of housing market area, method of index
weighting, and the length of
the time periods used in the estimation process) can influence index
values and thus the quality of
information available on the market [Ref 5].
References to the research
(all outputs listed available on request from HEI)
[Ref 1] Geltner, D., MacGregor, B.D. and Schwann, G. (2003)
Appraisal Smoothing and Price
Discovery in Real Estate Markets, Urban Studies, 40, 5-6,
1047-1064.
[Ref 2] Devaney, S. and Martinez-Diaz, R. (2011). `Transaction
based indices for the UK
commercial real estate market: an exploration using IPD transaction data',
Journal of Property
Research, vol 28, no. 4, pp. 269-289.
[Ref 3] Adair, A., Berry, J. Hutchison, N.E., McGreal, S.
Poon, J., Watkins, C. and Gibb, K. (2005).
Investment Performance within Urban Regeneration Locations, Journal of
Property Investment and
Finance, 23, 1, pp. 7-21.
[Ref 4] Bourassa, S.C., Hoesli, M., Scognamiglio, D. and Sormani,
P., 2008 "Constant-quality
house price indexes for Switzerland", Swiss Journal of Economics and
Statistics, Vol. 144, pp.
561-575.
Details of the impact
Research at Aberdeen on indices has led to the development of new
resources which enhance
professional practice influencing, for example, the decisions of
institutional investors and, in turn
the performance of their investment portfolios. The urban regeneration
index has shaped public
policy in relation to regeneration schemes and planning while the
residential indices have
influenced decisions made by mortgage lenders and the housing choices of
the general public.
Transaction-based commercial property indices
Research on appraisal-based indices [Ref 1] has impacted commercial
property markets by
making investors more aware of the limitations of appraisal-based indices,
through the generation
of a new transaction-based UK index [Ref 2] and more widely, by showing
the potential for such
indices. The approach adopted by Aberdeen-based researchers has been
extended within the
REF period to European real estate data by the Investment Property
Databank, an independent
company that provides real estate performance analysis and indices for
investors, managers,
lenders and advisors [Source A]. Provisional UK and European
transaction-based indices are cited
in a major report by IPD on real estate volatility and capital adequacy
requirements in relation to
real estate portfolios under the Solvency II regulatory framework [Source
B]. In early 2012 the
European Central Bank recommended that, in order to improve market
efficiency and
transparency, EU members should provide information on their real estate
markets in the form of
transaction-based indices. For the period during which member states move
towards this goal, the
IPD European transaction-based indices (based on the index construction
approach developed in
Aberdeen) are being used by the European Central Bank and the central
banks of individual
member states.
Urban regeneration property Index
Building on research on regeneration areas [Ref 3], Aberdeen-based
researchers working with
colleagues from the University of Ulster and Glasgow developed a prototype
Urban Regeneration
Property Performance Index in 2003. This was launched in 2005 and the
index was produced
annually thereafter by researchers based in IPD and Savills until 2011
[Source C]. The IPD/Savills
Regeneration Index is now an established barometer for those involved in
urban regeneration
markets. For example, the development manager of Aviva's Igloo
Regeneration Fund, quoted the
index in response to a request for written submissions from the
Communities and Local
Government Select Committee in 2011 [Source D]. The index research was
also referenced in a
report published by the Scottish Government on town centre regeneration in
2011 [Source E].
More generally, the index provides information on the effectiveness of
regeneration policy
mechanisms, some of which include sizeable financial support.
Local and national house price indices
The hedonic index approach proposed by an Aberdeen-based researcher and
colleagues [Ref 4]
has been adopted since 2008 by the Swiss National Bank (SNB) [Source F].
The national and
regional house price information is used by the SNB to determine mortgage
lending policies, in
their estimation of household wealth, and in assessing the risks of a
housing bubble which would
have a significant impact on monetary policy.
With the aim of eventually replicating the real estate residential
property derivatives which exist in
the US, the hedonic indices have also been available, since 2008, on the
Swiss Stock Exchange
[Source G] thus substantially improving the reliability and (as shown in
the underlying research) the
quality of information on the Swiss housing market to potential investors.
Since summer 2012, the Aberdeen house price index has been produced by
Aberdeen-based
researchers each quarter. It is published on the ASPC website [Source H]
(which typically hosts
more than 50,000 searches each day) and Aberdeen University's Centre for
Real Estate Research
website, and is regularly quoted by local media and recently in the
national press. It is used by a
wide range of beneficiaries including the local council (to inform
residential planning decisions),
surveyors, Council of Mortgage Lenders members (i.e. banks and Building
Societies) and potential
house buyers and sellers in North East Scotland. Local housing
associations have referred to the
index in setting rental levels, as the rents they charge have to be
justified in relation to market
within which they operate.
Sources to corroborate the impact
1. [Source A] IPD European Transaction Linked Indices
http://www1.ipd.com/pages/dnnpage.aspx?desturl=http://www.ipd.com/sharepoint.aspx?tabid=3912
2. [Source B] IPD Solvency Review II (2011): See: http://www.ipd.com/sharepoint.aspx?tabid=3251
3. [Source C] The Urban Regeneration Property Performance Index is
published annually by IPD
and Savills see:
http://www.bpf.org.uk/en/files/reita/reita_org_documents/analysis/Savills__IPD_-_regeneration-index-2011.pdf
4. [Source D] House of Commons (2011). Regeneration, Sixth Report of
Session 2010-12, The
Stationery Office Limited, London.
http://www.publications.parliament.uk/pa/cm201012/cmselect/cmcomloc/1014/1014.pdf
5. [Source E] Scottish Government Social Research. (2011). Town
Centre Regeneration: How
Does it Work & What can be Achieved? Edinburgh, Scotland.
http://www.scotland.gov.uk/Resource/Doc/358309/0121114.pdf
6. [Source F] Swiss National Bank: Link to Real Estate Indices (section
O):
http://www.snb.ch/en/iabout/stat/statpub/statmon/stats/statmon
7. [Source G] Swiss Stock Exchange: Link to Real Estate indices:
http://www.six-swiss-exchange.com/indices/other_en.html
8. [Source H] Aberdeen house price index : https://www.aspc.co.uk/information/house-prices/
Corroborating statements available from the research users
9. Advisory Director, Investment Property Databank /MSCI
Provides confirmation of Devaney's input into the Transaction-based
commercial property
indices and the contribution of Aberdeen-based researchers to the
development of the urban
regeneration property index.
10. Chairman, Aberdeen Solicitors' Property Centre
Provides confirmation of the development and production of the Aberdeen
house price index by
researchers based in the Centre for Real Estate Research at the University
of Aberdeen, and
its significance in terms of the quality of information available on the
local market and the range
of different beneficiaries.
Notes:
Professors Hutchison, MacGregor and Dr Schulz were full
time members of staff in the Real
Estate Group at Aberdeen throughout the REF period. Professor Hoesli
was employed throughout
the REF period on a 20% contract. Professor Roberts moved from a
full time to 20% contract in
2013. Dr Devaney was employed on a full time contract from 2007 to
2012. Dr Wersing joined the
group in 2012. Owusu-Ansah was a PhD student based in the Real
Estate group between 2009 - 2012,
gaining his doctorate in 2012.