Right Space, Right Price? A Study of the Impact of Changing Business Patterns on the Property Market

Citation

Sayce, S. (1999), "Right Space, Right Price? A Study of the Impact of Changing Business Patterns on the Property Market", Journal of Property Investment & Finance, Vol. 17 No. 5, pp. 528-532. https://doi.org/10.1108/jpif.1999.17.5.528.1

The very title of this publication, which comprises a set of six working papers, is daunting. All readers of this review will be only too aware of just how fast the business context is changing and of the increased volatility that now prevails in the commercial property market. Yet the subject of this research is both timely and important. A decade has passed since the University of Reading published its report into the management of operational property assets highlighting how little corporate owners and occupiers really understood about their properties’ performance. That report emphasised how far apart were the worlds of business, in which property represented just part of the resource base, and the world of property advisers, who largely did not share in the corporate decision making process.

The last decade has gone some way to promoting a better understanding of property in the corporate portfolio and of the needs for property people to understand their business clients. This research offers an opportunity to take both these strands forward in the quest for better knowledge of the inter‐relationship between demand for space and the operation of the market.

The researchers who undertook this RICS commissioned research were set a very difficult task. How were they to capture two very rapidly changing environments and assess their inter‐relationships in such a way that they provided not only a commentary on what had happened but might also point to the future? Indeed, before reviewing each individual paper it is worth reproducing the stated aims for the work. These were to:

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  determine the impact on lease structures of changes in the business space market; and

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  assess the impact of these changes on the overall operation of the commercial property market.

A tall order for any set of researchers, and the team of Neil Crosby, Virginia Gibson, Colin Lizieri, Sandi Murdoch and Charles Ward, all from the University of Reading, are to be commended for their attempts to fulfil their client’s instruction. It is not clear from the report who at DTZ Debenham Thorpe took part in the research. The authors have produced a set of papers, albeit still in working format and hence in need of some editing, which will, I predict, be widely cited in years to come. Not only do they contribute to the research base but, perhaps more importantly, they provide an extensive bibliography from which others can work.

One of the main challenges in tackling such a wide project must be where do you start?

Sensibly, the authors adopted an approach of starting with a literature review in Paper 1, written by Virginia Gibson and Colin Lizieri. This reviews the literature of the three major strands that they identify have affected business practices and which potentially affect property markets (they call them real estate markets, perhaps in recognition of the US base to much of the literature). These are the changing organisation of production and distribution function, business restructuring and the role of IT and communications. The conclusions, inter alia, pointed to a reduction in business space requirements per worker, increased functional obsolescence and a need for more flexible leasing structures, all resulting in a requirement for more adaptable valuation models. Given the extensive bibliography, the conclusions they draw are perhaps more tentative than they need have been and present few surprises. Their chief contribution to the debate is that they provide a basis for future research and – I suspect – will provide a useful addition to many student reading lists. They also presented the agenda for the remaining papers.

The issue of lease structures was one of the main aims. Papers 2 and 5 address the issue (why these did not form Papers 2 and 3 I find illogical). Paper 2 is authored by Neil Crosby and Sandi Murdoch and Paper 5 by Neil Crosby and Colin Lizieri. Paper 2 – entitled “Changing lease structures in commercial property market” relies entirely on previously available material, albeit that it does include a newly compiled tabulation of lease terms across selected entries. As to be expected, given the reputation of the authors, the work is approachable, concise and presents a useful synopsis of the current position in terms of lease practice. The international perspective is particularly welcome given the relative paucity of published material and the increasing need to understand property in a global context. However, as with Paper 1, there is little in the conclusions to the paper that would present many surprises to those actively operating in the commercial letting market – although it is always very useful to be able to support practice with academic review!

Paper 5 comprises one of the few pieces of new data collection contained in the papers, although even this was more in the nature of a fresh and detailed analysis of information gathered by IPD. In conducting the analysis, which aims to support or refute the findings in Paper 2, the authors acknowledge the skewed nature of the data, which reflect a bias towards prime properties lying within institutional portfolios. Nevertheless, the analysis is rigorous and does much to shed more light on what has been happening in the letting market in recent years. In retrospect, had the information been integrated with that in Paper 2 it might have enabled the research team to draw firmer conclusions pointing more to future practice trends than providing an analysis of the recent past.

The second main aim of the research was to assess the impact of business changes on the commercial property market. This was addressed by Virginia Gibson in Paper 4. This paper builds on the results of the literature research reported in Paper 1 and sought to verify and enhance those rather tentative findings by survey work. The report is largely the result of this “small scale” work. Given that this report was perhaps the most important in tackling the central theme to be addressed, the size of the survey (only 45 firms) and the limited profile of the respondents (a significant lack of small and medium sized enterprises (SMEs) and start up businesses) was disappointing, as was the lack of cross tabulation analysis undertaken. Despite these methodological shortcomings, the results prompted me to make pages of notes of issues arising – surely the hallmark of useful research!What inevitably was concluded was a need for more research!The conclusions that were postulated did, however, point to a much greater need on the part of the property “supplier” to understand the occupier market!

Readers will have possibly noted a lack of mention so far of Paper 3. This is because, despite the case being made for more flexible lease terms requiring flexible valuation models, the paper – entitled “Using asset pricing models to value property interests” – does not seem to sit comfortably among the other papers. This is not to invalidate it as an academic paper. It is a well argued exposition of the merits of adopting positive financially accepted models of appraisal for the capital valuation of property investment interests. It was implicity geared to institutional investment portfolios – albeit that it argued a relationship to lease structures. Admittedly, the scope of the project was to relate leases to property markets and institutional pricing is part of this picture – but the clear emphasis of the research was geared to occupier change, not institutional pricing.

The last paper contains the results of a focus group discussion convened to deliberate the issues raised in the first five papers. Focus groups are a valuable and currently popular research tool, but its validating rests on the expertise, both of participants and on the mediator(s) to the process. Handled well they can add depth, as the team pointed out. The groups compiled by the research team included well respected high level individuals but again there was a lack of representation from SMEs, or specifically new technology industries. Perhaps that could have been a contributory factor to the general agreement with the findings from the previous papers emerging from the focus groups.

In summary, how important is this research and how valid are its findings?

As I said at the start of this review, I am sure that this work will be deservedly and widely read and cited. It is a first real attempt to bring together themes which have too often in the past been dealt with in isolated boxes. Property professionals have long been accused of being over narrow in their focus. The combined literature base for these papers goes some way to addressing the deficiency. The papers are, however, very much working papers and should be viewed in that context. I hope that they will be taken for the important building blocks that they represent in the search to widen and deepen the appreciation that property, to have any value at all, must first meet the needs of its user and only second those who invest in it for purely financial return.

Priced @ £9.95 each they are a worthy addition to your bookshelves!