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Rental Adjustment & Valuation of Real Estate in Overbuilt Markets: Fundamental vs. Reported Office Market Values in Sydney Australia

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  • Patric H. Hendershott

Abstract

Real estate markets are periodically plagued by excess supply, rent concessions and few arms-length transactions. During such periods, valuation is problematic. The model presented here requires the forecasts of future vacancy rates, and equilibrium and actual rental rates. Vacancy rate forecasts of market participants are obtained, the equilibrium rental rate is specified as the cost of capital, and a rental adjustment equation is estimated in which real effective Sydney office market rents are related to gaps between both natural and actual vacancy rates and equilibrium and actual real effective rental rates. Value estimates (relative to replacement cost) for 1992, including that for above-market leases, are computed and the sensitivity to key assumptions is shown. Value/replacement-cost calculations are then made for the entire 1985-92 period and contrasted with comparable estimates implicit in data published by BOMA and JLW, two prominent Australian real estate sources. Lastly, the ratios of real effective rents to equilibrium rents and value to replacement cost are projected for the 1993-2006 period.

Suggested Citation

  • Patric H. Hendershott, 1994. "Rental Adjustment & Valuation of Real Estate in Overbuilt Markets: Fundamental vs. Reported Office Market Values in Sydney Australia," NBER Working Papers 4775, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4775
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    Cited by:

    1. Carmona, Juan & Lampe, Markus & Rosés, Joan R., 2011. "Spanish housing markets during the first phase of the rural-urban transition process," IFCS - Working Papers in Economic History.WH wp11-08, Universidad Carlos III de Madrid. Instituto Figuerola.
    2. Raymond E. Owens & Stacey L. Schreft, 1995. "Identifying Credit Crunches," Contemporary Economic Policy, Western Economic Association International, vol. 13(2), pages 63-76, April.
    3. Carmona, Juan & Rosés, Joan R., 2009. "Land markets and agrarian backwardness (Spain, 1900-1936)," IFCS - Working Papers in Economic History.WH wp09-02, Universidad Carlos III de Madrid. Instituto Figuerola.
    4. Kerry D. Vandell, 2003. "Tax Structure and Natural Vacancy Rates in the Commercial Real Estate Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 245-267, June.
    5. Haibin Zhu, 2005. "The importance of property markets for monetary policy and financial stability," BIS Papers chapters, in: Bank for International Settlements (ed.), Real estate indicators and financial stability, volume 21, pages 9-29, Bank for International Settlements.
    6. Davis, E. Philip & Zhu, Haibin, 2011. "Bank lending and commercial property cycles: Some cross-country evidence," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 1-21, February.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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