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

Steven Devaney, Oliver Holtemöller and Rainer Schulz

No 15/2012, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

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; Preisbildung auf Vermögensmärkten; Preisblasen auf Vermögensmärkten; Gewerbeimmobilien; London; Bauinvestitionen (search for similar items in EconPapers)
JEL-codes: C32 E30 G12 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-15-12

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