The IPF have just released a new version of admirable Understanding UK Commercial Property Investments: A Guide for Financial Advisors.   It’s also a really good guide for our students and anyone else coming to the sector.


Hot air bubble?

There was an odd piece in the Observer yesterday on WeWork by technology writer Evgeny Mozorov.  The piece was basically trying to frame the Wework share price phenomenon as a paradigm “This time it’s different” shift in real estate.  I’m a sceptic.  When I see things like

 as a technology company, its main asset is its data, not its properties and its rapidly expanding size allows it to extract and analyse data related to their use and under-use (“buildings are giant computers”, says its blog). Armed with the data, it can then offer tenants flexibility on space, furniture and leasing.

Really?  Is flexibility adding that much value to the commodity of space and fittings?

WeWork is expanding in many directions. It has launched living spaces, where members can rent flats above their workplace. It has launched a wellness centre. It has acquired a coding school, where its future members might learn to code. It has announced an elementary school that will treat students as “natural entrepreneurs”, thus allowing their busy parents to see more of their kids – at work.

Feels like over-reach and reminds me of the hype.

“Our valuation and size today are much more based on our energy and spirituality than on a multiple of revenue,” its co-founder, Adam Neumann, told Forbes.

Anyone interesting in shorting it?

Energy consumption and house prices: from Stockholm to Dublin

There’s a recent paper on the relationship between energy consumption and house prices in Sweden published in Energy Economics that I missed last year.

Wahlström, M.H., 2016. Doing good but not that well? A dilemma for energy conserving homeowners. Energy Economics60, pp.197-205.

The title rather anticipates the main conclusion.  Some of the findings look odd and I think that I may be missing something in the results.  They’ve got a sample of around 77,000 house sales in Sweden that took place in 2009 and 2010.  Probably the only thing that you’ll remember is that there’s an average of 107 frost days.  The average heated floor area looks large at 167 sq metres with an average plot size of 1333 sq metres which is even larger than expected.   There’s quite a mix of heating systems – electricity only, district heating system, biofuels, various heat pumps and mixtures of these.  The measure of energy consumption seems a bit vague.  I’m not really clear whether it is actual consumption or modelled consumption.

…energy consumption is defined as the energy purchased for heating and cooling and for household purposes during the preceding twelve months and is expressed in kWh. The specified quantities purchased are usually based on a combination of information from the owner and/or calculations made by the EPC expert.     

Using standard econometric techniques – that admittedly I’m no expert on – they find an apparently unexpected positive relationship between energy consumption and house prices.  In terms of individual attributes, they find that some features such as a ground sourced heat pump produce an 18% price premium.  Given a median price of €217,000, with ground source heat pumps costing close to €20,000, then it’s not a crazy figure but, as acknowledged in the paper, it looks high.

The author does an interesting model where, although many of the energy features are statistically significant, they are omitted from the specification. Without any loss of explanatory power, the results of this model find no effect of energy consumption on price.  One possible interpretation of this finding is that the various energy features may be capturing the effects of potentially omitted variables.  For instance, it may be the case that dwellings with ground sourced heat pumps tend to have other positive attributes that are unobserved i.e. such dwellings may have superior heating systems and may also be superior in other ways that were not recorded.  Turning to the finding that there is a positive relationship between energy consumption and house price, could the explanation be as simple as more affluent house buyers buy more expensive properties and also consume more electricity?

Turning closer to home, there was another paper published in Energy Efficiency that I also missed last year.

Stanley, S., Lyons, R.C. and Lyons, S., 2016. The price effect of building energy ratings in the Dublin residential market. Energy Efficiency9(4), pp.875-885.

Drawing upon 2792 list prices from Dublin in the period 2009-2014, basically they try to improve on one of their previous studies – which they do.  Samuel Beckett might say that they’ve failed better.   Overall their results look plausible.  However, it’s interesting to note that they find that properties rated EPC B1 have a discount relative to properties rated EPC C1 and the coefficient for A3 properties is actually positive (but not statistically significant).   My suspicion is that properties with A3 or B1 ratings are rare in two ways – a conventional and an Irish way.  Firstly, there’s hardly any of them.  It’s not clear from the paper but I’d guess that there’s three B1 rated dwellings and one A3 rated dwelling.  They’re also rare in that they may be unusual types of building in other ways than energy efficiency and may not be as attractive to more many mainstream buyers.

Going Dutch

With the Minimum Energy Efficiency Standards nearly upon us (they’re due to be introduced in April next year), the Dutch government has announced that it is going to go further than the British.  It is introducing from 2023 a requirement that all Dutch offices have to meet a minimum EPC rating of C.  With their annoyingly good language skills, you can read in English an initial overview of how it is expected to impact upon their market here.  The UK approach has been that offices with EPC F or G can’t be transacted after 1 April 2018.  Depending on the results of a policy review in 2020, all offices will need to have EPC E or better by 2023.  The Dutch seem to have been much more interventionist – it’s all offices (with exemptions for historic buildings), to a higher minimum level (EPC C), with little subsidy for building upgrades and it will affect about 40% of the existing office stock.  In the UK F and G stock account for approximately 20% of the total.

Real estate finance in paradise

Worth a look at this piece in the Guardian as a good case study into how many of the unlisted property funds structure themselves to avoid paying the price of civilisation and to be tax efficient.  It’s a difficult moral issue.  There’s the standard argument that “It’s legal.  Everybody does it and, if we didn’t, somebody else would”.  It’s surprisingly hard to refute.  Secondly, most of the fund returns are being returned to institutional investors who are often mass savings vehicles.  But – it still feels wrong.

Housing crisis debunked?

There’s some scepticism about the prevailing wisdom of a housing crisis.  I referred to a piece by Merryn Somerset Webb last year.  There’s some very interesting analysis by Ian Mulheirn at Oxford Economics on the so-called ‘housing crisis’.   In a number of posts, he takes a critical look at some of the stylized facts about the housing market.  I don’t have enough in-depth knowledge myself to evaluate the arguments but there are some interesting points that come out of the various blogs (see here, here and here)

  • Growth in the stock of houses has been running at around 176k per year since 2008 (some 24k per year morethan household growth).
  • ONS’s newish Index of Private Housing Rental Prices …shows…that the cost of renting on a like-for-like basis actually fell in real terms from the start of the series, in January 2005, to the end of 2014. (Rents have been rising a bit in real terms since then but up to November 2016 they’re still roughly 4% lower than their 2008 peak)
  • The true cost of owning a house — not the asset you accumulate by paying down the mortgage principal since, to repeat, this isn’t a cost — has been falling since prices and interest rates dropped after the financial crisis. Indeed we can see that the cost of owning has tended, with temporary divergences, to fluctuate around the cost of renting, which is exactly what we’d expect to see, according to simple asset pricing theory, when the housing market is in equilibrium.
  • Many econometric studies in the UK (see page 43 herefor a comparison of results) have concluded that a 1 percent increase in the housing stock per household will only cut prices by at most 2 percent. Consequently, even if we were to add 300k new houses per year (about 150k in excess of household formation, approaching 0.5 percent of current stock), this would only lower prices by about 1 percent per year. This is peanuts in the context of price rises over the past 20 years.

 The BBC have also been doing some interesting research on land use in the UK that suggests that there might be a disconnect between our perception of large parts England as a congested, concrete covered country and, er, reality.

Ordnance Survey data suggests that all the buildings in the UK – houses, shops, offices, factories, greenhouses – cover 1.4% of the total land surface. Looking at England alone, the figure still rises to only 2%.  Buildings cover less of Britain than the land revealed when the tide goes out.

All thought provoking stuff.

Estate Management?

There was a very good piece by Dave Hill in the Observer yesterday on the “regeneration” of a local authority housing estate in LB Haringey.

The north London borough of Haringey’s is planning to form a joint venture company with an international property developer (Lendlease – who also did the Heygate Estate), and commit tens of millions of pounds’ worth of its land and buildings – including a housing estate close to Tottenham Hotspur football club, and its own civic centre – to a massive transformation programme… At its heart lie basic conflicts about the role of private finance, the use of public land, the functions of local government and the principles that should guide the spatial development of urban areas all over the country. It has become a microcosm of a debate that rages across the country, drawing in beleaguered councils, property developers, social housing tenants, lower middle classes anxious to remain in gentrified neighbourhoods, and the growing army of homeless. And it is also about Jeremy Corbyn.

Although all existing residents are guaranteed a ‘right to return’ on the same terms as they currently have, there is a lot of resistance.

These types of projects have been common in London for the last decade – albeit the scale is usually much smaller.  At the heart of it seem to be some fundamental issues about the ‘model’ for replacing/upgrading existing and providing additional housing in local authority estates.  Most would agree that the existing stock needs substantial refurbishment or replacement.  I suspect that there would be a consensus that there is an opportunity to increase densities on former council estates to create additional supply.  The key question seems to be supply of what?  In essence, the debate seems to be about how much market housing should be provided relative to social housing.

I also suspect that partnering with companies like Lendlease sends a bad signal.  Personally I’ve got nothing against Lendlease – but I think that things would be much less controversial if the council had partnered with a large housing association instead.  Housing associations are in expansion mode and are becoming increasingly focussed on market housing – whether they should be is another question?  Would a large association have the capacity and capability to undertake such a large project?