1. To Hold or Not to Hold? An Analysis of Holding Periods in Five European Property Markets Jan Reinert jan.reinert@ipd.com July 2013 Portfolio Analyst, IPD Germany PhD Candidate, University of Regensburg

2. Agenda Literature Data Analysis Average Holding Periods Determinants of Holding Periods Holding Periods & Performance Conclusion

3. Literature

4. Relevance Most valuation models require a finite investment horizon The PV depends on the size and timing of the resale price Necessity to choose a benchmark interest rate with the same maturity (Gardner & Matysiak 2005) Performance of an asset is time period dependent (Cheng, Lin & Liu 2010) Unrealistic investment horizons give biased estimates and can lead to sub-optimal asset allocation (Collett, Lizieri & Ward 2003)

5. Literature RESEARCHERSMARKET TIME PERIOD METHODHOLDING PERIODOTHER FINDINGS Collett, Lizieri & Ward (2003) London, UK 1981- 1998 Cox proportional hazard model 7-12 years (median for standard shops) Decreasing holding periods over time, holding periods differ by size & sector, negative relationship between return volatility & holding period Gardner & Matysiak (2005) London, UK 1983- 2003 Based on sold properties 4.6-7.0 years (median over time) Decreasing holding periods over time, holding periods differ by location & investor type, 25% of properties are resold after 3 years, declining pattern of return over holding period Brown & Geurts (2005) San Diego, United States 1970- 1990 Based on sold properties, OLS regression 4.5 years (average for apartment buildings) Property characteristics (besides size) do not affect holding periods Fisher & Young (2000) United States 1980- 1998 Time until 50% of sample has been sold 8.6-13.7 years (median depending on sector) Decreasing holding periods over time, holding periods differ by sector, returns converge to market average as tenure lengthens Cheng, Lin & Liu (2010) United States 1978- 2008 Model for ex ante optimal holding period 4.3-5.3 years (expected optimal holding period) higher transaction costs lead to longer holding periods while price volatility decreases it

6. Hypotheses Holding periods in Europe differ by country, sector, lot size, location and investor Countries with higher return volatility have on average shorter holding periods Countries with higher transaction costs have on average longer holding periods Holding periods have been decreasing over time Excess returns converge to 0 as holding periods lengthen

7. Data

8. Data Set...supplied by IPD: Transaction Information (purchase & sale dates. price. transaction costs) Property Characteristics (location. sector. age. size. market rent) Performance Measures (total return. income return, capital value growth) Market Performance (National IPD Indices) Investor Information (Investor Type)

9. Data Set 51.110 Observations......from 5 European Countries

10. Analysis Average Holding Periods

11. Average Holding Periods (all years) Bottom 10% Top 10% Upper Q. Lower Q. Average Median

12. Distribution of Observations (by year of purchase)

13. Problem: sample selection bias due to different time periods of data sets  reducing datasets to the same time period: 1995-2012

14. Average Holding Periods (1995-2012) Bottom 10% Top 10% Upper Q. Lower Q. Average Median

15. Distribution of Observations (by year of purchase)

16. Frequency Distribution (1995-2012)

17. Holding Periods by Location (1995-2012)

18. Holding Periods by Sector (1995-2012)

19. Holding Periods by Investor (1995-2012)

20. Problem: Holding periods are only observed for sold properties, held properties are ignored  ”Survival Rates”

21. …3 Years?…6 Years?…9 Years?…12 Years?…15 Years? UK79%60%50%46%45% Germany94%84%79%78% France90%75%68%67% Netherlands87%72%61%55%52% Sweden70%51%44%40%38% After 6 years, 49% of properties in Sweden had been sold while only 16% of properties in Germany had been sold again. Survival Rates (1995-2012) What percentage of properties were still held by investors after...

22. Median 50% of properties in Sweden were sold after 6 ½ years while 50% of properties in the UK were sold after 9 years. 10%20%30%40%50% UK1.8 years3.0 years4.3 years6.1 years9.1 years Germany4.2 years8.3 years France3.0 years4.9 years7.8 years Netherlands2.5 years4.7 years6.3 years9.4 years Sweden1.3 years1.9 years3.1 years4.5 years6.5 years Survival Rates (1995-2012) After what time have XX% of properties been resold?

23. Survival Rates (1995-2012)

24. Holding Periods over Time (by year of purchase)

25. Holding Periods over Time (by year of sale)

26. Analysis Determinants of Holding Period length

27. Average Transaction Costs (all years)

28. Average Transaction Costs (1995-2012)

29. National IPD Indices

30. Risk/Return Profiles (1998-2012) 1-for-1-trade-off

31. HPMONTHS INSURANCE3.4** PENSION11.9*** OPENFUND4.8*** CLOSEDFUND12.7*** LISTEDCOMP3.4* UNLISTEDCOMP1.3 PRICEPURCH-0.0 PRICESALE0.0*** TCPURCH0.1 TCSALE-0.0 TR-2.9*** RR3.3*** STDEVRR-0.2*** NETHERLANDS18.8*** SWEDEN-46.5*** FRANCE23.6*** GERMANY-6.2** CONSTANT84.3*** R20.22 OBS9,723 Regression HPMONTHS Y199522.7*** Y199623.3*** Y199714.6*** Y199810.6*** Y19995.0*** Y2001-4.8*** Y2002-1.6 Y2003-5.8*** Y2004-11.7*** Y2005-22*** Y2006-36.6*** Y2007-47.5*** Y2008-50.1*** Y2009-42.9*** Y2010-42.8*** Y2011-55*** METRO0.6 OFFICE-5.8** RETAIL-3.7 INDUSTRIAL0.3 RESIDENTIAL8.2***

32. Regression UKNETHERLANDSSWEDENFRANCEGERMANY Y199523.1***50*** Y199624.7***43.6*** Y199718.1***37.9***43.2*** -1.1*** Y199812.3***34.7***29.3*** 8.4 Y19998.5***14.7***-3.2-33.5***14.1 Y2001-6.3***-17.3***-49.3***-7.7-4.6* Y2002-5.3***-26.2***-99.1***-10.6-12.4 Y2003-4**-23.5*** -28***-36.5* Y2004-9.4***-29.7***29.6-47.7***-27*** Y2005-26.1***-22.1***-8.5-52.3***-43.7*** Y2006-50.2***-34.2***-20.2*-57***-40.9*** Y2007-75.5***-73***-47.2***-79.8***-48.1*** Y2008-82.8***-158.1***-69.2***-91.1***-60.7*** Y2009-46.9*** -67.7*** Y2010-35.7*** -52.9*** -73.7*** Y2011-60.2*** METRO0.23.710.74.7*** OFFICE-9.7***-29.7***-25.7**-18.4**11.1 RETAIL-9.6***-6.8-10-0.21.2* INDUSTRIAL-1.8-10.80.4-24.8***5.2 RESIDENTIAL17***-8.43.9-21.4*-15.9 INSURANCE2.2-18.3***2.814.2**-25.4* PENSION10.5*** 10.8*8.5-94.5*** OPENFUND1.2 -3.818.2*-16.2*** CLOSEDFUND4.7 0.5 -1** LISTEDCOMP-1.811.4** 15.7***-27 UNLISTEDCOMP0.8-10.5***13.5*-3.3-0.6* PRICEPURCH0***00*00 PRICESALE0*** 0 TCPURCH003.9***1.2**0.4*** TCSALE-0.2-0.6-1.8**2.9***0.3 TR-4.2***-13.5***7.4***-3.9***10.8 RR4.8***15.9***-7.4***4.1***-11.1*** STDEVRR-0.2***-0.4**-0.10-0.3*** CONSTANT103.5***233.6***134.7***131.8***56.1 R20.240.580.490.510.67 OBS8257591393330152

33.  Heckman Correction …in progress… Problem: Censored data – Holding periods are only observed for sold properties, held properties are ignored

34. Typology SAMPLEY VARIABLEX VARIABLE Censored Y is known exactly only if some criterion defined in terms of Y is met. X variables are observed for the entire sample, regardless of whether Y is observed exactly. Sample Selected Y is observed only if a criterion defined in terms of another variable (Z) is met. X and W (the determinants of whether Z=1) are observed for the entire sample, regardless of whether Y is observed or not. Truncated Y is known only if some criterion defined in terms of Y is met. X variables are observed only if Y is observed.

35. Analysis Holding Periods & Performance

36. Holding Period & Excess Return (1995-2012)

37. Excess Return: UK (1995-2012)

38. Excess Return: Sweden (1995-2012)

39. Excess Return: Netherlands (1995-2012)

40. Excess Return: France (1995-2012)

41. Excess Return: Germany (1995-2012)

42. Holding Period & Excess Return (all years)

44. Conclusion

45. Conclusion I Holding periods seem to differ by country: between 1995-2012 the Netherlands had the longest while Sweden had the shortest simple average holding period Survival rates show that after 9 years 56% of properties in Sweden had been sold again while only 21% of properties in Germany had been resold 50% of properties in the UK and Sweden had been resold after 9 and 6 ½ years respectively Over the period of analysis less than 50% of properties in the Netherlands, France and Germany had been resold Holding periods in the UK seem to be declining since 1980 but the same cannot be said for the Netherlands and Sweden

46. Conclusion II Transaction costs were lowest in Sweden (which also had the shortest average holding period) France had the highest average transaction costs (especially for sales) Between 1998-2012 the UK market displayed the highest volatility while Germany was the least volatile (Sweden displayed the 2nd highest volatility) A regression over all countries showed that transaction costs did not influence holding periods (differening results in individual countries) Relative return had a positive impact on holding periods while return volatility had a negative impact In line with other studies, a pattern of declining excess return over holding period length was identified

47. Conclusion III Holding period analysis is constrained by the problem of CENSORED DATA Holding periods of properties still held by investors are unobservable. This can explain: a)differing average holding periods across countries b)declining holding periods over time c)pattern of declining excess return over holding period

48. References Brown, R., Geurts, T. 2005. Private Investor Holding Period. Journal of Real Estate Portfolio Management 11, 93-104. Cheng, P., Lin, Z., Liu, Y. 2010. Illiquidity, transaction cost, and optimal holding period for real estate: Theory and application. Journal of Housing Economics 19, 109-118. Collett, D., Lizieri, C., Ward, C. 2003. Timing and the Holding Periods of Institutional Real Estate. Real Estate Economics 2, 205-222. Fisher, J., Young, M. 2000. Institutional Property Tenure: Evidence from the NCREIF Database. Journal of Real Estate Portfolio Management 6, 327-338. Gardner, A., Matysiak, G. 2005. Holding Periods. Gerald Eve. Gerald Eve. 2012. Holding Periods, An analysis of holding periods and returns of institutionally held direct real estate investments.

49. Thank you for your attention. Jan Reinert jan.reinert@ipd.com Portfolio Analyst, IPD Germany PhD Candidate, University of Regensburg