THE ACCURACY OF PROPERTY FORECASTING IN THE UK GRAEME NEWELL University of Western Sydney and PATRICK McALLISTER University of Reading June 2009

PROPERTY FORECASTING Importance Uncertainty Procedures quantitative - qualitative Role of judgement 2008 property environment - UK@ -22.1% - Ireland @ -34.2% - Norway@ -4.7% - Sweden@ -3.3% - Spain@ -2.9% - France @ -0.9%

PREVIOUS RESEARCH Forecasting rents, yields etc. Econometric/structural modelling Comparison of forecasting procedures Simple forecasts versus econometric models

ACCURACY OF PROPERTY EXPERT FORECASTS US: Ling (2005) UK: McAllister, Newell and Matysiak(2008); Tsolacos (2006) Australia: Newell and Karantonis (2003); Newell and MacFarlane (2006) Consensus and individual forecasts

ACCURACY ISSUES Uncertainty Disagreement Conservative forecasts; bias Inertia Group differences “Numbers” versus “turning points” Individual forecasters - consistency - banding - persistence

PURPOSE Assess accuracy of UK property forecasts re: 2008 IPD Overall @ -22.1% IPD Office @ -22.4% IPD Retail @ - 22.6% IPD Industrial @ -21.2% Accuracy - uncertainty - disagreement Behavioural issues

METHODOLOGY Investment Property Forum “Survey of Independent Forecasts” 1998 – 2009; quarterly; UK Expert opinions : #= 18-37 - property advisors - fund managers - equity brokers Capital returns, rental growth, total returns Property sub-sectors Forecasts generated to end of year - up to 3 years ahead

METHODOLOGY Focus = 2008 total return forecasts Up to 36 months ahead 36M, 33M, …, 9M, 6M, 3M # 2006-08 participants: 24 – 37 # property advisors: 10 – 18 # fund managers: 9 – 16 # equity brokers: 3 – 5 Statistical analysis - MAE - MAPE - range - Theil U1 statistic

Target = -22.1%

MEAN ABSOLUTE ERROR 36M 24M 12M 6M 3M All : 22.4 19.7 13.3 8.4 5.3 PAs   36M 24M 12M 6M 3M All : 22.4 19.7 13.3 8.4 5.3 PAs 22.8 20.1 13.5 8.7 5.5 FMs 21.7 19.1 12.8 7.5 4.3 EBs 22.5 18.7 9.1 4.6 Office 23.8 20.8 13.1 7.7 Retail 22.3 19.9 14.4 9.5 6.0 Industrial 21.9 19.3 13.4 9.0 5.8

MEAN ABSOLUTE PERCENTAGE ERROR   36M 24M 12M 6M 3M All : 101.1% 89.1% 60.2% 38.0% 24.0% PAs 103.0% 90.7% 61.2% 39.1% 24.9% FMs 98.2% 86.5% 57.9% 33.9% 19.5% EBs 101.9% 84.7% 60.3% 41.0% 20.8% Office 106.2% 92.8% 58.4% 34.4% 20.5% Retail 98.9% 88.2% 63.5% 42.0% 26.6% Industrial 103.4% 91.0% 63.4% 42.2% 27.4%

THEIL U1 STATISTIC 36M 24M 12M 6M 3M All : 0.80 0.70 0.44 0.25 0.14   36M 24M 12M 6M 3M All : 0.80 0.70 0.44 0.25 0.14 PAs 0.81 0.72 0.45 0.26 FMs 0.79 0.69 0.43 0.22 0.11 EBs 0.66 0.28 0.12 Office 0.82 Retail 0.47 0.15 Industrial 0.16

AVERAGE RANGE 36M 24M 12M 6M 3M All : 10.30 10.70 10.40 10.20 9.50 PAs   36M 24M 12M 6M 3M All : 10.30 10.70 10.40 10.20 9.50 PAs 7.10 7.40 7.50 5.60 FMs 8.40 8.30 7.70 6.60 EBs 5.70 7.00 7.30 6.80

“BEST” FORECASTER: MAE   36M 24M 12M 6M 3M All : 16.70 14.10 7.80 3.70 0.60 PAs 18.70 16.00 9.30 5.10 2.10 FMs 17.30 14.80 8.60 4.00 1.10 EBs 19.60 15.40 10.10 5.90

“BEST” FORECASTER: MAPE   36M 24M 12M 6M 3M All : 75.50% 63.70% 35.40% 16.70% 2.70% PAs 84.60% 72.60% 42.10% 23.10% 9.50% FMs 78.30% 67.10% 38.70% 17.90% 5.00% EBs 88.90% 69.60% 45.50% 26.50% Theil 0.58 0.48 0.25 0.12 0.01

“BEST” FORECASTER Groups: Individuals: PAs: 0% - FMs: 75% - EBs:25%

“WORST” FORECASTER: MAE   36M 24M 12M 6M 3M All : 27.0 24.8 18.3 13.9 10.1 PAs 25.8 23.6 17.0 12.7 7.7 FMs 23.1 16.3 10.5 EBs 25.3 22.4 17.4 12.6

“WORST” FORECASTER: MAPE   36M 24M 12M 6M 3M All : 122.20% 112.00% 82.60% 62.90% 45.70% PAs 116.90% 106.60% 76.90% 57.50% 34.80% FMs 116.50% 104.60% 73.70% 47.50% EBs 114.70% 101.30% 78.50% 57.00% Theil 0.91 0.86 0.67 0.47 0.30

“WORST” FORECASTER Groups: Individuals: PAs: 42% - FMs: 0% - EBs:58%

PROPERTY FORECASTING IMPLICATIONS Accuracy re: 2008 property forecasts Uncertainty versus disagreement Conservative bias Improvements over time : 36M  3M Critical times Group differences Sector differences Other issues re: changes in forecasts - impact of news - expected returns (IPD monthly) - anchoring 2009 property forecasts?