Empirical analysis of space and capital markets in South Africa: A review of the REEFM- and FDW models

Abstract

This paper assesses the different models, in conjunction with the different theories surrounding the distinction and interdependencies between space-and capital markets. First, the theory of space-and capital markets is discussed with reference to two models, the FDW and the REEFM models. The FDW model provides a diagrammatic explanation of the behaviour of the property market, while the REEFM is an econometric model based on statistical principles that are able to forecast property-market behaviour by interpreting specific given variables. The REEFM model as the perceived more sophisticated model, untested in South Africa, was then analysed to test its applicability in the South African context. The findings confirmed the applicability of the model, although one part is not confirmed and is suggested for further research.

Analysis of the South African input-output table to determine sector specific economic impacts: A study on real estate

“…In addition, there are various models and literature that explain the relationships within the property sector, collectively referred to as space and capital markets (Archer & Ling, 1997;Archour-Fischer, 1999;Dipasquale & Wheaton, 1992;Du Toit, 2002;Fisher, 1992;Fisher, Hudson-Wilson & Wurtzebach, 1993;Viezer, 1998;and Viezer, 1999). Boshoff (2013) performed a case study on the applicability of these models to the South African economy. The explanation of space and capital markets by various authors highlights the interrelatedness of real estate and certain economic applications.…”

“…It is important to note that real estate forms a critical part of the economic system and that it is equally influenced by economic variables. Boshoff (2013) shows that a long term relationship exists between the demand for space and construction activity that forms the supply of real estate and thus dictates the equilibrium point of real estate activity.…”

“…This is in order to understand the extent of the sector in the economy, as well as to indicate the trends of activity. It is important to note that the relationship between the real estate sector within the wider economy, as well as the activity in the construction is typically explained under FDW and REEFM models (Boshoff, 2013).…”

“…In order to validate this theory, it is necessary to make reference to the FDW-model or other similar space-and capital-market models, as well as the South African NIPA accounts. The FDWmodel is provided in Figure 25 and its applicability to the South African commercial property market is previously explained by Boshoff (2013).…”

“…Source: Adapted from Boshoff (2013) The circular flow of activities in the FDW-model is initiated by a demand for space in Quadrant 1 in the form of rent per square meter. The value of rent as carried forward to asset valuation Quadrant 2, whereby the rent is capitalised into a market value, represented by the slope of the asset value line and the subsequent intersection of the capitalised value on the x-axis.…”