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The Future of Global Real Estate
A syndicated research programme uncovering the future of global property values
Economist Intelligence UnitCountry and Economic Research
March 2009
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A new dawn for real estate?
• Economic boom of the last six years characterised by:- huge increase in credit and liquidity- high demand for assets – equities, bonds, commodities, property
• Nevertheless, cheap credit not the only driver of property prices- demographic trends- changes in incomes- pace of urbanisation- macroeconomic environment
• But in many markets property prices rose far above a level which could be justified by these long-term drivers, i.e. above “fair value”
• Recent credit crunch accompanied by property bust of spectacular proportions
Long-term “fundamentals”
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What about existing real estate research?
• Not many ‘global’ products as such- different consultancies focussing on different regions - e.g. Global Insight & Moody’s for US, Jones Lang LaSalle for
separate regions- coverage mostly for developed / OECD economies
• Many survey based forecasts- short-term forecasts; limited country coverage- e.g. PwC “Emerging Trends in Real Estate”
• Modelling based on macroeconomic fundamentals seems restricted to academic research and international organisation working papers- e.g. International Monetary Fund’s (IMF) World Economic
Outlook, 2008; OECD Economic Outlook No.78, 2005
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Our methodology
• Theoretical background:
- IMF, WEO 2004: “House prices in Australia, UK, Ireland and Spain exceeded their predicted values by 20 pc”
- IMF, WEO 2007: “During 1997 to 2007 […] house prices were [up to] 30 pc higher than justified by the fundamentals”
- OECD, Economic Outlook 2005:”To address [overvaluation] it is necessary to relate these prices to their putative underlying determinants”
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Our methodology
• Econometric analysis to arrive at a real estate 'fair' price equation- based on a regression which best explains past price fluctuations given
historical economic data- determine what should have happened to prices given the path of economic
fundamentals in the past and determine the 'price gap‘
• Forecasts: apply price equation to our in-house macroeconomic forecasts- determine the future path of 'fair' prices of real estate in light of future
macroeconomic conditions- EIU’s forecasting approach will combine long-term economic forecasting
with property specific factors and will ensure that price forecasts take appropriate account of the state of the economy and income levels.
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Why the Economist Intelligence Unit?
Independent, long-run perspective requiredSome property specialists will forecast property prices based on historic trends and industry specific factors (such as availability of planning permits etc). But a truly insightful long run property forecast requires much more than this - it needs to be rooted in a deep understanding of the broader national and international economic context.
This is an area in which the EIU has a proven track record. Therefore the EIU’s forecasting approach, which combines long-term economic forecasting with property specific factors, is designed to ensure that our forecasts take appropriate account of the state of the economy and income levels. Many of the mistakes in forecasting property prices in the past have arisen because these factors were not taken sufficiently into account.
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Why the Economist Intelligence Unit?
World leader in country analysis and forecasting. For over 60 years we have provided business intelligence that corporate executives, government officials and academics require to understand developments around the world.
We cover more than 200 countries, providing economic forecasts on the world's 150 largest markets. A truly insightful long run property forecast needs to be rooted in a deep understanding of the broader national and international economic context. This is an area in which the EIU has a proven track record.
It is our analytical framework and forecasting methodology that gives us our competitive edge. Our approach combines the best in analysis–drawing on the country expertise of our specialists–and the best in forecasting, grounded in tested models, carefully vetted data and a quality–control process that ensures both accuracy and consistency.
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Our methodology – variables to test
Dependent variable
Change in real residential/commercial property price
Explanatory variables Explanation / Hypothesis
Lagged change in real price ‘Persistence’ effect
Price divided by personal income per capita ‘Reversion’ effect or affordability indicator
Growth in personal income per capita Reflects growing wealth and propensity to buy property
Income and corporation tax rates Act as downward pressures on the propensity to buy real estate
Short-term interest rate (real and nominal; current and lagged)
To reflect cost of borrowing for home-owners
Long-term interest rate (real and nominal; current and lagged)
Reflects long-term financing costs for commercial property development
Change in stockmarket prices Potential substitute for speculative investment
Population growth Creating higher demand and upward pressure on prices
Growth in the number of households Creating higher demand and upward pressure on prices
Population aged 20-39 divided by total population Reflecting pool of potential first-time buyers of property
Growth in supply of credit as percentage of GDP To account for credit conditions which influence ability to finance property acquisition
Unemployment Business cycle indicator and potential pool of consumers/labour force
Residential/commercial rental yield To account for buy-to-let investors; also to account for rental market substitute
Global /regional real estate prices Relative domestic price to global prices, reflecting decision to buy/sell in other regions
Dummy variables 'On or off' variables, including: 9/11 factor, Dot com burst, Banking crises
Price equation variables
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Our methodology – UK residential case studyWe are already able to accurately model quarterly UK residential property prices:
-.010
-.005
.000
.005
.010
0.98
1.00
1.02
1.04
1.06
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Residual Actual Fitted
But what would have happened if prices were driven only by economic fundamentals?
Model 1 drivers:- Income growth- Previous growth in price
(speculator effect)- Interest rates- Population growth- Growth in domestic credit- Labour market conditions
Real house price growth (Source: DCLG)
EIU model estimate
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-.10
-.05
.00
.05
.10
.15
-.2
-.1
.0
.1
.2
.3
82 84 86 88 90 92 94 96 98 00 02 04 06 08
Residual Actual Fitted
Our methodology – UK residential case study Annual UK property prices based on ‘fundamentals’:
Real house price growth (Source: DCLG)
EIU fair price model estimate
Model 2 drivers:- Income growth- Interest rates- Population growth- Economic development- Labour market conditions
Actual prices rose faster than the economic fundamentals since 1997
But undervalued from 1990 to 1996
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Our methodology – Spain residential case study
60
80
100
120
140
160
180
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Real house price
EIU fair price
Spain house price index, 2002=100
Price gap
Source: Banco de Espana; Economist Intelligence Unit estimates
Model 3 drivers:- Income growth- Interest rates- Population growth- Labour market conditions
Again, controlling for fundamentals, residential prices in Spain rose above our ‘fair’ value from 2003. During the economic downturn, we expect actual prices to converge towards the “fairer” levels and even undershoot based on past trends.
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Our methodology – UK commercial case study
Model 4 drivers:- Income growth- Interest rates- Population growth- Labour market conditions- Residential prices
We have also applied our approach to commercial property values. The preliminary results are shown below. Changes in key economic variables are able to explain much of the change in commercial property prices
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A new dawn for real estate?
A model of residential and commercial property prices in over 50 countries and 70 cities to identify "fair value" for each market based on long-term fundamentals.
An exciting research project that will provide members with exclusive insight into the real estate market around the world.
• In which countries is real estate overvalued and how low are prices likely to fall?
• When can we expect a recovery?• Which markets are undervalued and where
will the next investment opportunities occur?
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What will our research provide?
• Access price data for over 50 countries and 70 cities via a secure online platform
• Identify which markets are over- or undervalued and target your investments effectively
• Download exclusive forecast data for residential and commercial property prices to 2020
• Network with peers online• Understand the key economic fundamentals
driving real estate market prices around the world
There are numerous benefits arising from participating in this programme:
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Americas Eastern Europe Middle East & Africa Asia Pacific
Argentina Austria Netherlands Bulgaria Israel Australia
Brazil* Belgium Norway Croatia South Africa China
Canada Cyprus Portugal Czech Republic United Arab Emirates Hong Kong
Colombia Denmark Spain Estonia India
USA Finland Sweden Hungary Indonesia
France Switzerland Latvia Japan
Germany United Kingdom Lithuania Malaysia
Greece Poland New Zealand
Iceland Serbia Philippines
Ireland Slovak Republic Singapore
Italy Slovenia South Korea
Luxembourg Turkey Taiwan
Malta Ukraine Thailand
* Commercial only
Western Europe
Geographical coverageCountries – over 50
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Geographical coverageCities - over 70
Americas Eastern Europe Middle East & Africa Asia Pacific
Boston Amsterdam Paris Belgrade Dubai BangkokChicago Athens Rome Bratislava Tel Aviv (tbc) DelhiDenver Berlin Stockholm Budapest Johannesburg JakartaLas Vegas Birmingham Vienna Istanbul* Kuala LumpurLos Angeles Brussels Zurich* Kiev ManilaMiami Copenhagen Kosice MumbaiNew York Dublin Krakow SeoulSan Diego Edinburgh Ljubljana ShanghaiSan Francisco Frankfurt Prague Taipei (tbc)Washington Glasgow Riga TokyoToronto Helsinki Sofia Sydney Montreal Lisbon Tallinn MelbourneVancouver London Vilnius AucklandBuenos Aires Madrid Warsaw WellingtonBogota Manchester ZagrebSao Paulo* MilanRio* MunichMexico City* Oslo * Commercial only
Western Europe
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What are the research deliverables?
1. Online accessA dedicated, secure micro-site for downloading and manipulating data and analyses, including a discussion-forum with EIU analysts and other syndicate members
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What are the research deliverables?
2. Real estate databaseAccess comprehensive data on residential and commercial real estate prices for over 50 countries and 70 cities, annual and quarterly, including latest data and historical time series (480 data series)
3. Market studiesBriefing papers on the history and outlook for real estate for each country, including summary reports on the medium-term macroeconomic outlook
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What are the research deliverables?
4. Forecasts and scenario testingInteractive forecasting model with residential and commercial price projections to 2020 with adjustable parameters for various forecast scenarios
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Timing
Project plan - Real Estate SyndicateWeek 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10
Contracts finished, clients on board 1
Data collection - all price series (A & Q) (city/country) 1
Data collection - macro drivers (A & Q) (country) 1
Data collection - macro drivers (A & Q) (city) 1
Desk research - extra data collection 1
Database buliding 1
Model building - residential (country) (A & Q) 1 1
Model building - residential (city) (A & Q) 1
Model building - commercial (country) (A & Q) 1
Model building - commercial (city) (A & Q) 1
Model forecasts finalised and checked 1 1
Country briefings write up 1 1 1 1
Main report write-up 1 1
Reports sub-edit & finalised 1
Micro-site construction 1 1 1 1
Delivery 1
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The team Project management team
• Andrew Williamson, Global Director Economic Research• Gavin Jaunky, Senior Economist• Robert Metz, Senior Analyst
Economics team• Robin Bew, Editorial Director and Chief Economist• Robert Ward, Director, Global Forecasting• Chris Pearce, Director, Economics Unit; Director, Data Services
Regional teams• Charles Jenkins, Regional Director, Western Europe• Pat Thaker, Regional Director, Africa• Laza Kekic, Regional Director, Central & Eastern Europe; Director, Country
Forecasting Services• Justine Thody, Regional Director, Latin America• Gerard Walsh, Regional Director, Asia• David Butter, Regional Director, MENA