Bayes researchers identify the best indicators for monitoring market risk in different commercial real estate sectors
The most reliable measures for detecting real estate price bubbles vary depending on the type of property, according to a new study.
Researchers at the Bayes Business School (part of City St George’s, University of London) found that the yield curve is a good indicator of “price explosions” in the retail and industrial property sectors, with inflation also being a good indicator of the former. However, rental growth is a more effective indicator of a potential collapse in the office space market – and also serves as a good indicator of dangerous price excesses in the industrial property sector.
Inflation now also seems to be a good indicator of possible excessive prices in the office and retail real estate markets.
A bubble hunt
The research, led by Professor Giovanni Urga, Director of the Bayes’ Centre for Econometric Analysis (CEA), and real estate expert Professor Sotiris Tsolacos, relied on the MSCI real assets database to systematically monitor signals and detect the formation of bubble prices in the UK commercial real estate sector between December 1986 and April 2022.
The team found phases of excessive prices in all real estate sectors, albeit at very different times. The boom between 2003 and 2007 was the only phase in which excessive dynamism was recorded in all sectors.
In the article published in the Journal of Financial Stability, CEA researchers point out that such differences are understandable “because office, retail and industrial firms respond differently to macroeconomic conditions and are affected by different sector-specific trends, such as the impact of e-commerce on the retail sector.”
Professor Urga said: “Given the risks that adverse price developments in real estate markets pose to financial stability, the Centre’s research is specifically focused on detecting such developments and providing early warnings that benefit investors, lenders and regulators.
“The Bayes CEA can provide real-time or monthly data so policymakers can issue warnings, lenders can reconsider their lending criteria and fund managers can take action to mitigate risks to their portfolios.”
Professor Tsolacos noted: “After high inflation, our research suggests that the key commercial real estate sectors are unlikely to experience a price bubble.
“However, monthly price monitoring of commercial real estate markets is even more important in a time of uncertainty and change. The study also shows that anyone monitoring the health of commercial real estate markets needs to use the indicators most appropriate for each sector.”
They found that while there was a price bubble in the warehouse sector following the Covid pandemic, prices gradually settled to more sustainable levels.
