Planning Regimes and Behavioural Patterns in Commercial Property Investment Pricing
||Henneberry, John and Fotis Mouzakis
||Planning Regimes and Behavioural Patterns in Commercial Property Investment Pricing
||Book of Abstracts: 2005 European Real Estate Society conference in association with the International Real Estate Society
||This paper departs from the outcome of three different pieces of recent research by the authors. One used a conceptualisation of a local property market to develop a structural theory for the impact of planning on local business rents and on the behaviour of the wider local economy. Another attempted to gather empirical evidence to support the relationship of that the structure mentioned above is a key determinant of property investment pricing, by means of econometric modelling of commercial property yields. A third study proposed a behavioural decomposition of the yield equation with the risk premiums in focus, which also included a mechanism for depreciation rates. Although all three pieces of research were supported by significant statistical evidence from UK data for the links they tried to establish. Each study focused on a special aspect of commercial property pricing, allowing so for simplicity in the examination of it, allowing however for distortions in the composition of the big picture from missing variable bias in the separate studies. This paper attempts to consolidate the findings of previous works and propose a complete structure for commercial property investment value. First it brings together the most powerful elements of the previous approaches and examines their theoretical validity. Investors' behaviour in pricing is assumed to follow a mix of both rational and behavioural patterns reflected in the yield movement. Rational patterns include an efficient reflection of yields on available information on rental growth, depreciation, interest rates and market risks. An important rational leading indicator of rental growth is the planning regime of the market in question, along with traditional ones such as anticipated economic activity, relating to tenant and investment markets by liking directly investment pricing with the proposed fundamental variables of commercial property industry. The behavioural mechanisms in consideration focus on the formation of views for risk premiums and pricing inertia, including an irrational leveraging of local market views from the performance of central markets. The empirical study of UK markets that follows tests the validity of this generalised theoretical approach and examines a range of alternative model specifications and dynamic structures and data series. It seeks for patterns of causality, in particular for the link of planning regime in its role as an investment performance leading indicator.
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