Efficiency in the Real Estate Market: Case of Energy Efficiency
-
Upload
connor-blake -
Category
Documents
-
view
40 -
download
0
description
Transcript of Efficiency in the Real Estate Market: Case of Energy Efficiency
Ari Laitala
1
Efficiency in the Real Estate Market: Case of Energy Efficiency
Ari Laitala
Doctoral student
03/07/2013
Ari Laitala
Efficient market hypothesis (EMH)
• EMH, classical view of the market efficiency (Fama 1969, 1970)– Concludes that there are three different forms of market efficiency: weak,
semi-strong and strong– Focuses on the financial market and especially to the stock market– Focuses lot of macro-level approach
• How about the micro level approach?– Probably some transactions are more efficient than the others?– What kind of buyer is efficient? (or when)– What kind of seller is efficient? (or when)– Are prices alone a relevant scope to the efficiency? How about the value
and value/price ratios – What is actually meant by the efficiency and what could be the meaning
of it?
03/07/20132
Ari Laitala
What is efficiency?
• Efficiency is largely used in physics, engineering and in economics e.g.– Pareto efficiency, Kaldor-Hicks efficiency, market efficiency– Mechanical efficiency = measured performance / ideal performance
• We define: Efficient Market– Market is efficient if transactions in the market are efficient– (Market efficiency is a function of single transactions efficiency)
• We define: Efficient Transaction (Efficiency of a transaction)– Transaction is efficient if value creation of buyer and seller is maximised– (Transaction efficiency is a function of value creation)
03/07/20133
Ari Laitala
Subjective value for the buyer (SVB)
03/07/20134
+ =-
Subject pb1
Value judgement process
Subjective value for pb1
Object p1
Alternative consumption possibilities
Estimation of the probable price
Ability to buy ATB
Willingness to buy WTBincreases
Detected features (value factors)
Ari Laitala
Subjective value for the seller (SVS)
03/07/20135
+ =-
Subject ps1
Value judgement process
Subjective value for ps1
Object p1
Alternative consumption possibilities
Estimation of the probable price Willingness
to sell WTSincreases
Ari Laitala
Valuing value factors
Object can be understood as a set of features• Single buyer detects some of them• If a subject believes that a feature
has an capability to satisfy the needs and wants the feature has an effect to the subjective value
• If a feature has an effect to the subjective value we define the feature as a value factor
• Some features can be hard to value– Like cosiness of neighbourhood
• Potential buyer may realize that all the relevant value factors are maybe not detected at all
03/07/20136
+ =-
?
?
Ari Laitala
Efficient buyer and seller
• It is believed that buyer prefers best subjective value (SVB) / price ratio
• Finding best value offer in the market causes transaction costs– According to Kotler they are
• Financial, psychological, energy and time related
• Accruing searching costs limit the benefits of finding the best value offer (value proposition)
• Buyer is efficient to the point where increasing transaction costs exceed the probable benefits finding better value offers
• Case of efficient seller is very same: seller is believed to prefer highest offer and searching the best offer causes transaction costs as well
– Seller is efficient to the point where increasing transaction costs exceed the probable benefits of finding higher bids
03/07/20137
Ari Laitala
Value creation process
03/07/20138
Val
ue in
crea
ses
SVB
SVSSVB
SVS
SVB
SVS
MV
Value creation = value detecting + value capturing (finding best + negotiation power value proposition )
MV
MV
Value can be maximised in this transaction!
Ari Laitala
Conclusions so far
• The more efficient the transactions in the market are the more efficient the market is
• The more efficient the buyers and sellers are the more efficient the transactions are
• The more the buyers and sellers are able to create subjective value the more efficient they are
03/07/20139
Ari Laitala
Case of pipe repair
03/07/201310
Ari Laitala
Efficient buyer Average buyer
Average buyer Inefficient buyer
Pipe repair has not been Pipe repair has been done done in the apartment you in the apartment you are selling are selling
Pipe repair has been done in the apartment you are buying
Pipe repair has not been done
in the apartment you
are buying
Game of sell and buy in the suburban housing market
03/07/201311
Ari Laitala
Some results of the energy efficiency survey within Finnish professional commercial property valuers (3/2013)
03/07/201312
I totally disagr
ee
I disagree to some extent
I slightly disagr
ee
I slightly agree
I agree to
some extent
I totally agree
No justifications
to answer =
balance figure value
Energy efficiency in the commercial property market can be seen as a detectable value factor 0 7 12 27 25 8 3 82 50,0 %Costs of the building´s energy efficiency may exceed the benefits 0 7 7 12 31 17 8 82 56,1 %
Energy efficiency of the commercial property has an effect to the market value of the property 0 11 14 25 24 6 2 82 36,6 %Energy efficiency of the commercial property has an effect to the subjective value (e.g. investment value) of the property 0 5 12 24 28 8 5 82 52,4 %Financial effect of the energy efficiency is so small in commercial property valuation that it disappers to the accuracy of the valuation 1 7 13 24 24 9 4 82 43,9 %There is an interest in commercial property market how large CO2 emissions use of the building causes on yearly basis 11 25 14 15 7 0 10 82 -34,1 %
Ari Laitala
Some indicative conclusions related to energy efficiency in the Finnish commercial property market
• Energy efficiency is quite clearly a detectable value factor (agreed to some extent)
• Related to the earlier and general results– Energy efficiency has been very largely reported to have a positive effect to the market
values• Yes, of course, but energy efficiency seems to have its price, benefits don´t necessarily exceed
the costs
• Energy efficiency has an effect to the value– Effect to the cost based investment value is more significant than to the market values
• Hereby, market mechanism seems to smooth the differences between subjective and objective values
– Even though commercial property market is believed to be totally cash flow driven
• There seems to be a possibility to make efficient and inefficient transactions in relation to energy efficiency
03/07/201313
Ari Laitala
So what?
• Does invisible hand of the commercial property market have enough power to speed up the market transformation?
• No!– We are going to see more new regulation which highlights the pros and cons
of the energy efficiency (sustainability)– It is very problematic with the existing buildings
• If our real goal is to decrease CO2 emissions, our journey is in its beginning
• Thanks, questions and comments– [email protected]
03/07/201314
Ari Laitala
References / Further Reading
• Maier, G. & Herath, S. 2009. Real Estate Market Efficiency: A Survey of Literature. Vienna University of Economics and Business Administration. Department of City and Regional Development. Saatavissa: SRE-Disc sre-disc-2009_07
• Quan, D & Quigley, J. 1991 Price Formation and the Appraisal Function in Real Estate Market
03/07/201315