Construction Of Jones Lang Lasalle Prime And Secondary Index

The UK economy is in a recession. In its latest Inflation Report, the Bank of England is forecasting the UK economy will contract around 4% in 2009. This perspective is more negative than the governmentís forecast announced in the Budget which predicted that GDP would contract by 3.5%. The pace and timing of the recovery is uncertain at the present time, although it will be affected by the contraction in world demand, weak trade and constrained financial markets. The economic deterioration impacted Commercial Real Estate significantly. Property values have dropped by 26% over 2008. The IPD annual index recorded the lowest total returns ever, with all property returns falling by 22.1% in 2008. The financial meltdown in the aftermath of the collapse of Lehman Brothers and the continued casualties within the banking and the corporate sectors is adding to the current misery. We are clearly in an uncharted territory. Given the current climate a tool to measure investment performance of prime and secondary properties is crucial. Logic would suggest that prime properties would prove more resilient compared to secondary properties in the downturn. We do not yet, however, have any indices in the property sphere to prove this and compare performance of such properties. Thus, the aim of this project is to suggest a useful way to construct a prime and secondary index. This would enable us to analyse performance of both prime and secondary properties not only at all property level but also for individual sectors (office, retail and industrial). The analysis is based on Jones Lang LaSalle valuation data (913 properties). The equivalent yield is used and divided into quartiles. Initial and Reversionary yields can also be used to conduct the same analysis. The top and bottom quartiles represent the two groups, prime (top quartile e.g properties with low yield) and secondary (bottom quartile e.g properties with high yield). This analysis utilises equivalent yields as it encapsulates all the property characteristics such as covenant strength, lease length, sector, location and building quality. In order to exclude ìhybrid propertiesî the middle two quartiles were ignored. In addition only the ìsuper primeî and ìsuper secondaryî (properties which remained in the top and bottom quartile over the period studied 1994 to 2008) assets were included. Similarly quartile analysis using capital values has been conducted. The performance between the two methods was compared to observe which method captures the market cycle well. In order to test this both indices were compared with the IPD (Investment Property Bank) total returns for low and high yield band. Subsequently, few statistical tests were applied to analyse the obtained distributions of returns.