Page 0 Re-examining the modelling of yields in a volatile market by Ben Burston DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0) Kostis Papadopoulos DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0) & Tony McGough DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0) Paper presented at the 17 th European real Estate Society Conference, Milan, Italy – June 23 rd 26 th Draft paper: Not to be quoted without permission from the authors.
Page 1 Introduction Methodology Model Impact of global volatility Implications of modelling output
Page 2 Introduction Previous model (Hicks & McGough 2005) provided a framework for our yield analysis Previous equation looks at impact of Rental expectations Bond prices Fixed risk premia via constant Present model Incorporates transaction volumes Money supply Methodology
Page 3 Issue of pricing of risk
Page 4 Yield history and financial pricing within markets Source :DTZ Research
Page 5 Source :DTZ Research Testing for a breakpoint in 2003
Page 6 Data used Variables RR = real rents Bond = 10 year government bond Divy = Dividend Yield Trvn = transaction volume numbers RMoney = Real money supply Time Series Quarterly London Office rents
Page 7 Yield equation to bonds Source :DTZ Research
Page 8 Source :DTZ Research Yield equation to bonds
Page 9 Source :DTZ Research Yield equation to 2003 – dividend yields
Page 10 Source :DTZ Research Full model to 2009 Q4 - bonds
Page 11 Source :DTZ Research Full model to 2009 Q4 – dividend yields
Page 12 Source :DTZ Research Full model to 2009 Q4 – key findings Changes in relationships Bond relationship turns negative Dividend yield relationship insignificant Serial correlation appears Why? Chasing the yield Outward movement of yields following financial crisis
Page 13 Source :DTZ Research Full model to 2009 Q4 – solutions Need to incorporate other variables into this analysis In particular risk measures and time varying premia
Page 14 Risk pricing from near zero to 400 bps
Page 15 Source :DTZ Research Full model to 2009 Q4
Page 16 Source :DTZ Research Full model to 2009 Q4
Page 17 Conclusions Source: DTZ Research London (City) London (West End) Madrid Paris Sydney Frankfurt New York Shanghai Tokyo Structural break found in yield relationships using old methodology Previous relationships have changed in the current environment More sophisticated modelling of risk needed to take into account more volatile risk markets