Efficiency in the UK Commercial Property Market: A Long-Run Perspective

IWH Discussion Paper 15/2012

Posted: 20 Jul 2017

See all articles by Oliver Holtemöller

Oliver Holtemöller

Halle Institute for Economic Research; Martin Luther University Halle-Wittenberg

Rainer Schulz

Humboldt University of Berlin - School of Business and Economics

Steven Devaney

affiliation not provided to SSRN

Date Written: 2012

Abstract

Informationally efficient prices are a necessary requirement for optimal resource allocation in the real estate market. Prices are informationally efficient if they reflect buildings' benefit to marginal buyers, thereby taking account of all available information on future market development. Prices that do not reflect available information may lead to over- or undersupply if developers react to these inefficient prices. In this study, we examine the efficiency of the UK commercial property market and the interaction between prices, construction costs, and new supply. We collated a unique data set covering the years 1920 onwards, which we employ in our study. First, we assess if real estate prices were in accordance with present values, thereby testing for informational efficiency. By comparing prices and estimated present values, we can measure informational inefficiency. Second, we assess if developers reacted correctly to price signals. Development (or the lack thereof) should be triggered by deviations between present values and cost; if prices do not reflect present values, then they should have no impact on development decisions.

Keywords: asset pricing, bubbles, commercial property, London, real estate investment

JEL Classification: C32, E30, G12

Suggested Citation

Holtemöller, Oliver and Schulz, Rainer and Devaney, Steven, Efficiency in the UK Commercial Property Market: A Long-Run Perspective (2012). IWH Discussion Paper 15/2012, Available at SSRN: https://ssrn.com/abstract=3004429

Oliver Holtemöller (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Martin Luther University Halle-Wittenberg ( email )

Halle-Wittenberg, Sachsen-Anhalt
Germany

Rainer Schulz

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Steven Devaney

affiliation not provided to SSRN

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