Asset Price Inflation in Dutch Real Estate Office Markets

This paper considers commercial real estate markets relative to credit cycles of expansion and contraction. In this paper we integrate insights from the credit literature with insights from the long-standing literature on rental price adjustments in the space market. Do rental prices determine real estate asset prices? What effect do bank loans have in real estate asset prices? These questions are central in this paper. We present a simultaneous equation model with fitted values to examine dynamics of asset prices, rental prices, capitalization rates, and credit availability. For this we use a unique dataset with office asset transaction and rental transaction prices from 1995-2010 for twenty-two cities in the Netherlands. These cities account for over 60 percent of the national office market. No previous European work has been able to address the interplay between the space market and asset market at such a comprehensive level of coverage. We investigate the time series properties by testing for unit root and co-integration of the series. Econometric analysis suggests that the asset price is significantly affected by the rent and credit availability whereas the capitalization rate is not significant.