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)
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