IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

A quantitative framework for commercial property and its relationship to the analysis of the financial stability of the corporate sector

Author Info

  • John Whitley
  • Richard Windram
Registered author(s):

    Abstract

    In this paper a quantitative framework for analysis of the UK commercial property sector is developed, and the possible implications explored for the financial stability of this sector, and for the corporate sector as a whole. There is little previous empirical literature. But where there is, models have either studied particular markets or have developed single-equation approaches. Lack of suitable data has been a major impediment. A model of the real estate sector is constructed using econometric analysis of rental values and bank lending, supplemented by a calibrated model of the remainder of the financial accounts of real estate companies (using data for private and public real estate companies). Using related work on company-failure models, it is possible to extend the analysis to provide an equation for the probability of default of real estate companies. The empirical results fail to find a role for borrowing costs in the bank lending equation before 1999, but unless borrowing costs are included after this period, the equation breaks down and systematically underestimates the growth in lending to real estate from then on. Various potential explanations are examined for this breakdown, including the importance of sale and lease-backs. The estimated rental equation appears more stable. The historical tracking performance of the estimated real estate model fails to capture the full extent of the swings in capital values and bank lending in the early 1990s. This is attributed to shifts in the discount rate applied to property income, possibly reflecting a temporary shift in risk premia during this period. The property sector links to the rest of the private non-financial corporate sector through its role as collateral. Since the property model relies partly on macroeconomic influences it can be used in conjunction with macro models to provide forecasts of property values and the probability of default of property companies. Simulations that use this model with the Bank of England macroeconometric model show not only the sensitivity of the probability of default of real estate companies to selected macroeconomic shocks, but also the potential links between the commercial property sector and the financial health of the rest of the corporate sector.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2003/wp207.pdf
    Download Restriction: no

    Paper provided by Bank of England in its series Bank of England working papers with number 207.

    as
    in new window

    Length:
    Date of creation: Nov 2003
    Date of revision:
    Handle: RePEc:boe:boeewp:207
    Contact details of provider: Postal:
    Bank of England, Threadneedle Street, London, EC2R 8AH

    Phone: +44 (0)171 601 4030
    Fax: +44 (0)171 601 5196
    Web page: http://www.bankofengland.co.uk/
    Email:


    More information through EDIRC

    Keywords:

    This paper has been announced in the following NEP Reports:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Gertjan W. Vlieghe, 2001. "Indicators of fragility in the UK corporate sector," Bank of England working papers 146, Bank of England.
    2. E P Davis, 1993. "Bank Credit Risk," Bank of England working papers 8, Bank of England.
    3. Patric H. Hendershott & Colin M. Lizieri & George A. Matysiak, 1999. "The Workings of the London Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 365-387.
    4. Andrew Benito & John Whitley, 2003. "Implicit interest rates and corporate balance sheets: an analysis using aggregate and disaggregated UK data," Bank of England working papers 193, Bank of England.
    5. Richard J. Herring & Susan Wachter, 1999. "Real Estate Booms and Banking Busts: An International Perspective," Center for Financial Institutions Working Papers 99-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Geroski,Paul A. & Gregg,Paul, 1997. "Coping with Recession," Cambridge Books, Cambridge University Press, number 9780521626019, November.
    7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    8. Stiglitz, Joseph E., 1992. "Capital markets and economic fluctuations in capitalist economies," European Economic Review, Elsevier, vol. 36(2-3), pages 269-306, April.
    9. repec:sae:niesru:v:139:y::i:1:p:88-94 is not listed on IDEAS
    10. E. P. Davis, 2001. "Multiple Avenues of Intermediation, Corporate Finance and Financial Stability," IMF Working Papers 01/115, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    as in new window


    Cited by:

    1. Krzysztof Olszewski, 2013. "The Commercial Real Estate Market, Central Bank Monitoring and Macroprudential Policy," Review of Economic Analysis, Rimini Centre for Economic Analysis, vol. 5(2), pages 213-250, December.
    2. Michal Hlavacek & Ondrej Novotny & Marek Rusnak, 2014. "Office Property in Central European Countries," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2013/2014, chapter 0, pages 148-155 Czech National Bank, Research Department.
    3. Haldane, Andrew & Hall, Simon & Pezzini, Silvia, 2007. "Financial Stability Paper No 2: A New Approach to Assessing Risks to Financial Stability," Bank of England Financial Stability Papers 2, Bank of England.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Access and download statistics

    When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:207. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.