Modelling and Forecasting Office Returns in the Helsinki Area

This paper presents an econometric investigation of office returns determination in the Helsinki area, a small European market, over the thirty-year period 1971-2001. Particularly, the study investigates the variation in office capital growth, which is the most volatile component of office total return in the Helsinki market, by using three alternative techniques: a regression model, an error correction model (ECM), and an integrated autoregressive-moving average model with exogenous explanatory variables (ARIMAX). The study also evaluates the forecasting performance of the alternative models. The results indicate that the ARIMAX models, incorporating past values of capital growth and growth in service sector employment and GDP, are able to pick up shocks, which are present in the data, and thus provide the best forecasting tool of office returns in Helsinki. The ECM models, which incorporate long-run information, cannot satisfactory model the irregularities of the Helsinki office market, such as the boom-bust cycle of the 1980s-90s, and thus are suitable for modelling and forecasting only part of the Helsinki market. It is predicted that office capital returns will continue to grow in real terms by 0.4% on average in the period 2002-2005. This implies that real office total returns will grow on average at the rate of 6% over the same time period.