Quality of market data has improved, but the researcher's role remains challenging, say Keith Steventon and Kieran Farrelly

Property researchers are charged with informing investors, developers and occupiers on current market conditions and future market trends, which can then be fed into corporate or investment strategies. The first step is assembling relevant market data, and this is sourced from advisers and independent research consultancies working in property and supplemented with data from public authorities. However, this data varies enormously, in terms of available time series, construction methodology, history, depth, timeliness and quality, which makes a consistently applied research process difficult to implement.

The foundation for all property market research is analysis of the leasing market. The key data requirements are the quantity of space on the market (supply), the quantity of space leaving the market (take-up), and the price at which transactions take place (rent). The vacancy rate, calculated as the current supply as a percentage of the stock, is a helpful supplementary indicator of the pressure on the market, while the pipeline of developments helps to show how quickly that pressure will be relieved. Since all market information is contained in the price, we can use the rent as an example of the issues faced in comparing national markets.

In continental Europe and Asia, prime market data is the most widely used information by researchers, where prime refers to the top end of the market: the best quality buildings in the best locations. This is sourced from the property advisers and independent research houses - you can ring a property broker anywhere in the world and they will instantly provide you with a prime rent.

Unfortunately that is merely the beginning of the researcher's problems. Views as to which buildings are to count as prime are probably less of an issue than the estimation of what rent should apply. Should this be the last achieved rent for the appropriate prime building or the hypothetical rent in the current market? Are the concessions that landlords will make to be used in adjusting the asking or headline rent down to an effective rent (as is common in the US), or not?

Some analysts, especially those working in the US, work with ‘average' market data, reflecting a more representative sample of assets of varying degrees of quality and age. Problems that can arise here include assembling all the rents from all the lettings over the relevant time period and producing the desired average. These two broad sources - prime and average - are not directly comparable, even where both are available. As an illustration, before comparing global rental trends using these two sources, prime rents would need to be adjusted for the impact of depreciation, innate in the average data.

These issues are compounded by national customs and practices that have to be accounted for when interpreting data. Here is a simple one. Rents are quoted per surface area unit: metres in Europe; tsubo in Japan; feet still in the UK, despite the pressure on the industry to metricate. Surely it is simple enough to apply conversions? Unfortunately not, since measuring practices vary significantly between countries and even within countries. Is the rent you've been quoted for the gross letting area or for the area net, say, of communal space and reception areas?

Yields are the most closely monitored indicator in investment markets. To make judgements of the relative value of markets and sectors, yields are the crucial starting points, yet across the world these are not uniformly stated. In the US, they are not even known as yields but as capitalisation rates, or cap rates for short. The dividend yield is the equivalent metric in equities, and clearly defined as dividends over market cap, making it easily comparable across markets. In property markets, income may be stated gross or net of some or all costs. Similarly, capital value is either stated inclusive of acquisition costs or on a market value basis.

A recent study(1) highlighted this inconsistency and sought to recalculate yields on a ‘triple-net basis' to ensure comparability. The triple-net yield is defined as net rental income over purchase price, and a number of service providers are working towards adopting this definition.

 An important group of data suppliers is the index providers. Investment Property Databank (IPD) is the pre-eminent organisation. Originally a UK property benchmark service for managed funds, IPD used its data to provide market indicators, and has replicated this in all major global markets. Given the wide pool of assets measured, IPD data is an ‘average' data source. IPD produces national indices for each country in which it operates, as well as European and consultative global indices. However, its development has not been easy and relies upon common valuation standards and procedures.

Despite the discipline imposed by IPD, significant issues remain with the data. The indices smooth the underlying market movements, and data points do not adjust sufficiently over successive time periods. When used in studies across asset classes, the results will underestimate the inherent volatility of property and bias results. The indices also lag market movements and do not sufficiently reflect turning points. This all arises from flaws in the valuation process itself, and variations in local market practice exacerbate this, meaning the researcher must make appropriate adjustments before its use.

The final challenges posed by indices or, indeed, any of the leasing and investment market indicators, are that the data can have wildly different time series and be subject to breaks and changes in methodology. These will have major implications for the validity of quantitative models that are run using property market data, particularly if a uniform process is being employed across markets.

As national investors became international, the pressure has been on the industry to clear the fog surrounding market data and install common standards. However, this remains elusive globally and researchers have to bear the harsh burdens of data inaccuracy and incompatibility, prior to employing qualitative and quantitative processes, which are used to inform market participants. It is also true that the coverage and quality of market data have improved in leaps and bounds over the past decade, but somehow the researcher's burden never seems to lighten.

(1)Kennedy P J, Sauer A M and Haddock M, (2004) European prime market yields - towards a consistent approach

Keith Steventon is head of research at Atisreal; Kieran Farrelly is associate director, global multi-manager, at CBRE Investors