Building a Real Estate Price and Rental Index for Cyprus Pat McAllister School of Real Estate and Planning University of Reading
Why create a property index? • Residential and commercial real estate comprise a large proportion of national wealth. • Real estate markets affect macro-economic performance and policy-making and the stability of the financial system. • Users include government, investors, lenders, market practitioners and the public (Cypriots and non-Cypriots). • Demand from users for transparency • Measuring and monitoring market change • Understanding market behaviour • Performance measurement • Benchmarking • Financial products
Accepted facts • There are numerous options for index construction drawing upon different data sources using different methods. • There are no agreed standards or frameworks – each type of index has strengths and weaknesses. • Indexes are typically constructed by government agencies, professional organisations, mortgage companies, data specialists and real estate advisors. • The construction of commercial real estate indices raises many different issues relative to residential indices.
Key issues • What is the purpose of the index? • How much data is available? • What are the qualities of the data that is available? • What resources are available?
Commercial property indices • Due to thin trading, indices based on actual prices are extremely rare. • Indices based on appraisals of actual properties have emerged across the EU. They are expensive and require a substantial presence of institutional investors • Indices based on appraisals of hypothetical properties are very common. • Provided by global real estate advisory firms – JLL, CBRE, DTZ and CWHB
Residential real estate indices • Much more diverse range of indices across the EU, US and Asia. • Main methods – hedonic pricing, repeat sales and simple averaging. • Prices or appraisals? • Prices – asking prices or recorded prices? • Sample – All transactions? Transactions recorded by a single company? • Result – measuring different things in different ways and, not surprisingly, producing different measures. • This diversity of approaches reflects diversity of purposes, motivations and resources for index construction.
Key points • It is common to have a range of index types in a single market. • The optimal solution for the construction of a real estate index is a function of purpose of the index, data availability, data quality and available resources. • For commercial property markets, hypothetical property indices are a common solution due to data problems. • For residential property markets, large scale price data is more readily available. You need to trust the data and you need to have more resources. • Due to inherent lag in price recording, indices based on hypothetical indices can record timing of market change effectively.
Building the RICS Cyprus Index • Monitoring property prices, yields and market rents. • Five main urban centres: Nicosia, Limassol, Larnaca, Paphos, Famagusta-Paralimni. • 46 different submarkets, for example for apartments in Nicosia: Latsia, Tseri, Acropolis, Engomi, etc. • For a range of hypothetical properties, • E.g. A 150 square meter shop on Makarios Avenue, Nicosia with 100 square metre ground floor and 50 square meter mezzanine. • Three RICS accredited valuers per urban centre, each providing data for that district only, i.e. 15 valuers in total. • Properties are to be valued every quarter and the results published by RICS Cyprus.
Findings – Prices per sqm Highest Retail and Office Prices Lowest prices across all sectors Highest Warehouse Prices Most expensive apartments
Findings – Monthly rent Highest Retail and lowest Warehouse rents Lower than average rents across all sectors Higher than average rents across all sectors Second highest warehouse rents
Findings – Initial yield Highest Retail and lowest Warehouse yield Highest warehouse yield Lowest retail and officeyield Highest retail and lowest office yield
Interpreting the Numbers • The distribution of residential prices shows no substantial variation between the major urban centres. Possibly consistent with the distribution of income across the country? • Not unexpectedly, however, the highest prices and rents are found in the largest urban centres. • Retail rents in Nicosia appear to be very high relative to the other major centres. Due to a very limited supply? Justified by higher turnover? • Large variation in initial yields across urban centres and across sectors. Suggests imperfect market? Due to restricted supply of investments for sale? • Compared to other major EU markets, initial yields appear low.