19-Jun-2010 Yield development in the real estate office market: The effect of obsolescence Prof. Dr. Aart C. Hordijk MRICS H.H. Koerhuis-Gritter MSc.

19-Jun Contents Why bother about obsolescence? Data Analysis Results Conclusions Suggestions for further research

19-Jun Why bother about obsolescence? Buildings grow old Valuations: –GIY/NIY method  raise on initial yield –DCF method  exit value Obsolescence hidden because of continuing sharpening of yields in rising markets Change in market circumstances Renovation or depreciation

19-Jun Data ROZ/IPD Property index 15 years of valuation data Unique dataset offers research opportunities

19-Jun Analysis 1Reversionary yield vs exit yield (DCF Method) 2Yield in relation to year of construction 3Yield of properties 10 years in index vs market yield 4Market rent in relation to year of construction

19-Jun Explanations Initial yield: Contract rent (excl vacancy) Value of the property Reversionary yield: Market rent (incl vacancy) Value of the property Exit yield: Market rent (excl vacancy) in year 11 Value of the property in year 11

19-Jun Analysis 1: Method Reversionary yield vs exit yield (DCF Method) 1995 – 2008 data Reversionary yield instead of initial yield 10 years DCF horizon Difference between weigthed average RY and EY –Absolute and in percentage terms Centre vs non-centre locations

19-Jun Analysis 1: Results Average % difference 11.4% for a 10 years period (1.1% per year) Average absolute difference is 0.92 % point (0.09 % point per year)

19-Jun Analysis 1: Results Spread is less for offices on centre locations (0.82 % point) than for offices on non-centre location (0.93 % point)

19-Jun Analysis 2: Method Yield in relation to year of construction 1995 – 2008 data Reversionary yield, weigthed average Year of construction classes: < – – > 2004

19-Jun Analysis 2: Results On average a 10 year younger building had a 0.8% point lower yield, which means 0.08% point per year

19-Jun Analysis 3: Method Held properties vs market yield 1999 – 2008 data 243 properties which have been in the ROZ/IPD Index for 10 years Market yield as calculated by IPD Difference absolute and in percentage terms

19-Jun Analysis 3: Results The longer properties are in portfolio the more their performance will stay behind the market performance Obsolescence is on average 0.07% point per year In percentage terms the difference 1% per year

19-Jun Analysis 4: Method Market rents per year of construction Market rents per square meter from 2001 to 2008 Year of construction classes as in analysis 2

19-Jun Analysis 4: Results On average 16 euro decrease in market rent in 10 years Average market rent is 130 euro, so 12% decrease in 10 years, which is around 1 percent per year

19-Jun Conclusions Obsolescence in yield varies between 0.09, 0.08 and 0.07 percentage point per year as result from analysis 1, 2 and 3 (1% per year in percentage terms) Obsolescence in rent around 1 percent per year in analysis 4 In general obsolescence turns out to be higher than generally is expected

19-Jun Further research Research is based on office figures from The Netherlands alone Extention of the research to other countries is highly recommended

19-Jun Thank you! Contacts: Prof. Dr. Aart C. Hordijk MRICS University of Tilburg Leonie Koerhuis-Gritter MSc. IPD Netherlands