Explaining Commercial Rents Using An Error Correction Model With Panel Data

This paper presents rent models for retail, office and industrial property in the U.K. Panel data are used covering 11 regions for 29 years, enabling us to overcome the limitations of a relatively short time series. We use an Error Correction Model (ECM) framework to estimate long run equilibrium relationships and short term dynamic corrections. The combination of panel data and an ECM is an innovative approach that is still being developed in econometrics. We construct new supply series that combine infrequent stock data with more frequent construction data. For each property type, separate regional models are estimated. The regions are then combined into a number of panels on the basis of the income and price elasticities in the long run and short run models. Unlike previous studies, we find no evidence of a broad north-south divide between low growth and high growth regions. Like these studies we do find a London effect: demand elasticities in London with respect to both price and supply are much lower in magnitude. We conclude that, while the economic drivers may vary, there is no evidence of differences in the operation of the regional property markets outside London. Our final models are parsimonious with single measures of economic activity and of supply and always support the use of an ECM.