Property Market Forecasting – Valuation Implications

CRC CI Scholarship Advantages

• OPPORTUNITY – step away from fulltime work for research focus

• ALIGNMENT – affiliate research with industry / partner

• PRACTICALITY – generate results of practical use to industry / partner

CRC CI Scholarship Advantages

• DRIVE – research driven in association with CRC CI project

• BELONGING – research given place / support / facilities

Department of Public Works Portfolio

Department of Public Works Portfolio

COMMISSARIAT STORES 1828 33 CHARLOTTE ST – UNDER CONSTRUCTION

Department of Public Works – Brisbane CBD Office Space

Brisbane CBD - DPW Controlled Office Space

170,111163,792

1,314,404

DPW Owned DPW Leased Balance

Square Metres

Property Market Forecasts

• Modern valuation (DCF) methods require explicit property market and economic forecasts

• DCF method discounts projected building net income back to derive a present value

• Forecasts required for building rents, opex, capex, vacancy rates and property market net returns

Setting the Scene• Commercial property market is volatile

• Australian lenders wrote off about $28B during 1991-1994 (Sykes 1996)

• Large proportion of losses attributable to commercial property market “bust” (Kummerow

1999)

• Commercial property market “bust” was a recession driver

Setting the Scene

Brisbane CBD - Historical Prime Rents and Vacancy Rates

$0

$50

$100

$150

$200

$250

$300

$350

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Year

$ R

ate

/ m2

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Rent Rate Vacancy RateSource: BIS Shrapnel

Setting the Scene• Office space oversupply contributor to market “bust”

• Development based on viability studies containing forecasts

• Over-optimistic linear, compounding rent forecasts induced office space oversupply

• Requirement for rational property market forecasts based on leading indicators

Property Industry Rent Forecasts

Comparison - DCF - Forecasts Market Rent Growth

-8.00%-6.00%-4.00%-2.00%0.00%2.00%4.00%6.00%8.00%

10.00%12.00%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

% C

hang

e

Company A Company B Company C Company D Company E Economists

Brisbane Historical / Forecast Rents

Brisbane CBD Prime Rent Rate - Historical & Valuers' Forecasts

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Year

% C

hang

e

Actual Historical Change 5 Valuer Firms' Median

Forecast

SOURCE - BIS Shrapnel & CBD Valuation Firms

Forecasts - Valuation Impacts

DCF Results Comparison - Alternate Rent & CPI Forecasts

$107

,500

,000

$108

,000

,000

$108

,500

,000

$105

,000

,000

$102

,000

,000

$105

,500

,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

$90,000,000

$100,000,000

$110,000,000

$120,000,000

Company A Company B Company C Company D Company E Economists

Forecast Source

$

Forecasting Models• Extensive US and UK research on property market forecasting models

• Dominant models rely on series of regression equations

• Process of identifying which leading indicators generate property market change

• Equations map historical change over several property cycles

Correlation – Property & Economic Factors

Historical Relativity - Property and Economic Factors

0

50

100

150

200

250

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year

Inde

x

Building Net Income Effective Rents InflationVacancies Construction EmploymentGross State Product

Source: ABS, BIS Shrapnel & PCA

Brisbane CBD Commercial Property Market

Brisbane CBD Sales - Total Value Commercial Property Sales

$0

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

$700,000,000

$800,000,000

$900,000,000

$1,000,000,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year

$

Brisbane CBD Commercial Property Market

Brisbane CBD Sales - Median Rates / m2 NLA - Office Buildings > 3,000m2

$0$500

$1,000$1,500$2,000$2,500$3,000$3,500

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Year

$

Department of Natural Resources & Mines – Mapping Technology

Research Plan• Literature Search and Review (Completed)

• Forecasting Model Identification (Completed –22 American and British models found)

• Brisbane Market Data Collection (Completed)

• Model Testing (Underway – Completion September 2003)

• Property Professional Survey (Interviews – Staff from 14 Firms – August 2003)

Research Plan• Brisbane CBD Value Mapping Development (Work Underway with DNRM – Completion September 2003)

• Software Development, Testing & Linkages (Completion December 2003)

• International Journal Article (Completion January 2004)

• Thesis Write-Up (Underway – Completion and Submission February 2004)

• Possible Articulation to PhD (February 2004)