Transaction based indices for the UK commercial property market: exploration and evaluation using IPD data

The nature of private commercial real estate markets presents difficulties for monitoring market performance. Assets are heterogeneous and spatially dispersed, trading is infrequent and there is no central market place in which prices and cash flows of properties can be easily observed. Appraisal based indices represent one response to these issues. However, these have been criticised on a number of grounds; that they may understate volatility, lag turning points and be affected by client influence issues in relation to the underlying inputs. Thus, this paper presents an econometrically derived transaction based index of the UK commercial property market using IPD data and compares it with published IPD valuation indices for this market. The method is similar to that presented by Fisher et al. (2007) and used by the MIT Centre for Real Estate on NCREIF portfolio records, although it employs value rather than equal weighting. The results show stronger growth from the transaction based index in the run up to the peak in the UK market in 2007 as well as larger falls thereafter. They also show that the transaction index is more volatile than the valuation series, but, surprisingly, differences in the timing of turning points are not found. Hence, the paper concludes by debating why this might be so, as well as the applications and limitations that this transaction based series has as a practical market performance measure.