Making sound decisions

Investors have long known how important real estate research is – as have financial market regulators. Nevertheless, obtaining and evaluating the data remains 2028a difficult endeavour.

America, you have it better. Just a short Google search and you have a list of all property sales in Manhattan between July 2018 and June 2019. 242 pages reveal what was purchased when and where and at what price it changed hands.

Need an example? On 10 June 2019, the office building at 22 W. 38th St. was sold at a price of US$ 60.5 million. And that's not all. We learn that the building has more than 60,000 square feet (around 5,600 square metres) of floor space, is located on a 4,938 square-foot lot (around 460 square metres), was built in 1912 and has 20 commercial rental units. 

The same information is available for housing sales: on 11 March 2019, a buyer paid US$ 5,203,258 for the 1,650 square-foot (around 153 square metres) apartment 26A at 16 W. 40th St. built in 2015. After another click, it becomes clear that the apartment is in The Bryant, the first residential tower in New York designed by star architect David Chipperfield.

Purchase price data and data protection

This type of data is a dream not only for private or professional real estate buyers and owners, but also for government statisticians, private analyst firms and major investment companies. In Germany – like most other European countries – things will stay the way they are for now. Although purchase price data is collected here first-hand, the circle of those able to access it is relatively small. These insiders include committees of real estate valuation experts across the entire country. They receive a copy from notaries of every property sale contract under their jurisdiction. They summarise all the data pertaining to value in a purchase transaction register. The only catch: all the information is subject to data protection.

Nonetheless, the data is evaluated statistically and the results published in property market reports from the local real estate valuation committees. However, there is a significant delay and market reports are often released only once a year.

Investment decisions need to be carefully reasoned more than ever before. Good research helps keep uncertainties and risks as low as possible.
Olaf Janßen, Head of Real Estate Research at Union Investment

Insider knowledge is in demand

In order to follow and track the actual transaction activity on the local or – aggregated – national real estate markets, insider knowledge of a sufficient number of property transactions is necessary. Large international consulting firms provide this service for traditional commercial real estate markets for office and retail properties. Their market shares are high and their knowledge of transactions is accordingly deep.

In fact, Olaf Janßen, Head of Real Estate Research at Union Investment, confirms that "most data is currently obtained from real estate agents or specialised institutions." According to the expert, the quality has improved considerably over the decades. "Real estate market research started to become more important in Germany back in the 1990s at the same time market transparency was increasing significantly,” notes Janßen. However, the data published by the different firms about the same market segments and time periods does not always match up.

That is a problem that the Society of Property Researchers (Gif) in Wiesbaden is well aware of and trying to counter. Not only has it established definitions in recent years for the most important benchmarks like prime rent, prime yield, vacancy rate as well as how to calculate floorspace, it also regularly prepares a consensus forecast on future trends in Germany's office and investment markets. To develop this forecast, Gif’s property market research group of experts and the Center for Real Estate Studies (CRES) at Steinbeis University in Berlin started surveying researchers at German and international real estate firms – including service providers, portfolio holders and credit institutions – back in 2011 semi-annually about their estimates for prime yields and vacancy rates in Germany's top five office locations.
Much of this market data is publicly available free of charge – including the Gif/CRES Consensus Office Market Forecast. "However, it's often necessary to pay for market data," comments Union Investment researcher Janßen about the reality of the situation. That might become more common in the future, he believes: "Real estate agents are trending toward publishing less data and deploying the data they collect more heavily towards winning customers and gaining their loyalty."

The twelve-storey office building at 22 W. 38th St. built in Manhattan in 1912 (centre) was sold in June 2019 for US$ 60.5 million.
iStockphoto/Getty Images

Official statistics have data gaps

Wouldn't utilising official statistics be an alternative for budget-conscious real estate trustees such as open-ended real estate funds? Not really, says Olaf Janßen: "Very little commercial real estate market data comes from official statistics."Like its counterparts in other European countries, the German Federal Statistical Office captures statistical data on price developments in the national – and sometimes regional – housing and construction markets, but it lacks a similar instrument for the commercial sectors.

This shortcoming has been recognised at the highest international political levels and attempts are underway to address the issue. The catalyst was the insight gained following the financial market crisis of 2007 to 2009 that price trends in commercial real estate markets have a substantial impact on financial stability. Therefore national developments need to be observed more closely. In 2013, the finance ministers of the top 20 industrialised nations (G20), their central banks, the International Monetary Fund and the Financial Stability Board agreed to develop suitable instruments to monitor commercial real estate prices in addition to the existing price development indices for residential properties. 

The European Central Bank in Frankfurt am Main is working on the Commercial Property Price Index (CPPI) – a mammoth project in the EU member states.
Martin Moxter/Westend61

Benchmark at EU level is a mammoth project

In Europe, the European statistics agency Eurostat, the European Central Bank, the individual national statistical agencies and central banks have been working since then on the Commercial Property Price Index (CPPI). Harmonising the data from member states so that it can be compiled into a single benchmark at EU level is truly a mammoth project. Nevertheless, a 200-page-long working paper has been available from Eurostat since 2017 that defines the fundamentals on collecting and processing data on the commercial real estate markets in EU countries.

Now it's the national statistical agencies’ turn, but the obstacles still seem to be powerful there. In a study from January 2019, Thomas A. Knetsch, Christine Schlitzer and Elena Triebskorn – statisticians from the German Federal Bank – complain that "official statistics can only partially deliver reliable and comprehensible information about real estate prices." The data gaps are still too large – and this applies far more to the commercial market than the housing market. According to the German Federal Bank paper, there still is no consensus on data sources, measurement parameters or practical implementation.

Good research reduces investment risks

No one disputes the fact that reliable real estate market data is a must for financial supervisory authorities at state level and higher as well as for yield-oriented investors. "Purchase decisions are simply easier to make with data collected by researchers," says Olaf Janßen.

Ultimately, this really is the only sensible basis for evaluating location quality, appropriateness of purchase price and rent levels, possible future development projects in the area and how long spaces remain vacant between leases. His motto is: "Investment decisions need to be carefully reasoned more than ever before. Good research helps keep uncertainties and risks as low as possible."

By Anne Wiktorin

Title image: Fernelis Lajara/EyeEm/Getty Images

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