The determinants of regional real estate returns in the United Kingdom: a vector error correction approach

Abstract

This study provides a detailed analysis to regional office real estate markets in the United Kingdom. A vector error correction (VEC) approach is applied to a unique panel dataset that covers the time period from 1981 until 2004 and allows a disaggregation to the NUTS 2 level. Long-run equilibrium relationships and shortterm corrections among total returns and the key macroeconomic variables gross domestic product (GDP), total investment and unemployment are captured. Different samples are used to control for the special role of the London market and to alleviate potential bias due to differences in the number of properties within regions. The results leave little ground for assuming that the economic variables have no impact on total office returns. They rather provide evidence that there are relatively strong long-run relationships. The assumption is supported that the longrun relationships are causal and running from the economic variables to total return. Furthermore, there is evidence for short-term causal relationships between economic variables, in particular total investment, and total return, as well as for total returns adjusting to the long-term disparities resulting from changes in the variables. Consequently, the economic variables do not only seem to provide short-term information but also short-term immediate effects on the movements of total returns. The character of the long-term equilibrium and short-term corrections, however, is not identical across samples while London indeed seems special.

The Evaluation of the Impact of Macroeconomic Indicators on the Performance of Listed Real Estate Companies and Reits

“…Stevenson (2016), examining the drivers of correlation dynamics across global listed real estate markets, suggests that both financial and macroeconomic risk factors impact the degree of co-movement in real estate markets globally. Several authors (Kohlert, 2010;Park and Bang, 2012) examining the Korean market and the UK market find that economic indicators are the dominant drivers of the returns. In fact, developed markets are more stable and thus macroeconomic indicators, such as unemployment rate, inflation, interest rates tend to be less volatile.…”

What do business rates measure?

“…It is generally accepted that there is a correlation between the two, with changes in GVA driving rental growth. Research using property investment data (Kohlert, 2010) shows a positive relationship between GVA and property values in the UK office market down to NUTS 2 level (approximating to a large county). However, this is only a positive correlation, after controlling for other variables, rather than a predictable and proportionate relationship.…”

The use of combination forecasting approach and its application to regional market analysis

“…Local and regional market forecasts are not frequently employed, although literature is replete with regional investigations. Earlier studies by Grubel (1968), Friedman (1971), and Smith, Shulman (1976), as well as more recent studies by Malizia, Simons (1991), Eichholtz et al (1995), Lee (1998b,a), Lee, Stevenson (2005), Adair et al (2006), and Kohlert (2010) demonstrate the benefits of regional and sector specific investment portfolio diversification. These findings provide property market participants with "insights into the sector/regional decision choice" (Lee, Stevenson 2005, p. 408).…”