Rental Adjustment & Valuation of Real Estate in Overbuilt Markets: Fundamental vs. Reported Office Market Values in Sydney Australia

30 Pages Posted: 27 Jul 2010

See all articles by Patric H. Hendershott

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Date Written: June 1994

Abstract

Real estate markets are periodically plagued by excess supply, rent concessions and few arms-length transactions. During such periods, valuation is problematic. The model presented here requires the forecasts of future vacancy rates, and equilibrium and actual rental rates. Vacancy rate forecasts of market participants are obtained, the equilibrium rental rate is specified as the cost of capital, and a rental adjustment equation is estimated in which real effective Sydney office market rents are related to gaps between both natural and actual vacancy rates and equilibrium and actual real effective rental rates. Value estimates (relative to replacement cost) for 1992, including that for above-market leases, are computed and the sensitivity to key assumptions is shown. Value/replacement-cost calculations are then made for the entire 1985-92 period and contrasted with comparable estimates implicit in data published by BOMA and JLW, two prominent Australian real estate sources. Lastly, the ratios of real effective rents to equilibrium rents and value to replacement cost are projected for the 1993-2006 period.

Suggested Citation

Hendershott, Patric H., Rental Adjustment & Valuation of Real Estate in Overbuilt Markets: Fundamental vs. Reported Office Market Values in Sydney Australia (June 1994). NBER Working Paper No. w4775, Available at SSRN: https://ssrn.com/abstract=1649249

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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