The end of value increases in offices in Belgium ?
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This document provides an introductory presentation for a debate on the potential end of value increases in offices. It includes: 1. An overview of the presenter's 25 years of experience in corporate finance and their analysis showing office prices increasing minimally with inflation rates. 2. A summary of academic research showing long-term price increases through renovation but short-term decreases, as well as location and age affecting depreciation rates. 3. The presenter's own valuation model estimating costs for new office projects over time and locations, and hypothesizing future value evolution. 4. An analysis of value changes for Belgian office REITs from 1995-2019, showing average decreases of 1
The end of value increases in offices in Belgium ?
- 1. fin POWER Introductory presentation to a debate with Marc De Ceuster, University of Antwerp Serge Fautré, AGRE Philippe Janssens, Stadim by Koen Batsleer, Finpower & Officenter THE END OF VALUE INCREASES IN OFFICES ? Realty Summit, September 20th 2019
- 2. I. Introduction & origin of analysis II. Academic research III. Own valuation-evolution model IV. Value evolution of offices owned by Belgian REIT’s V. Conclusions VI. Additional remarks I. INTRODUCTION
- 3. I. Origin of analysis 1. From 1992 on : 25 year of corporate finance consultant within Finpower 2. 2010 : initiator of ‘Officenter-business model’ – Investing in ‘existing Belgian offices’ – Transforming them to modern business and coworking centers – Investment perspective: rental yield of 5-6 %, value of offices increases minimally with inflation rate – 2015-17 : prices/valuation of offices seems to decrease ... 2018-19: Master in Real Estate studies – Masterproof analysing this topic. – Conflicting results, to be challenged in this debate.
- 4. II. Academic research on this topic Property Life Cycle • Bokhari and Geltner, 2016 • Long term increasing prices through ‘renovation investments’ • Short term : decreasing prices
- 5. II. Academic research on this topic “Depreciation of value’ of U.S. real estate – 2 axes : • Location : the ‘better’ the location, the lower the average decrease (from 0 to > 2 %) • Age: newer buildings decrease faster then older (from 0 to > 2 %) – Both effects ‘enforce each other’
- 6. III. Own ‘valuation-evolution’ model • Estimation of investment-cost new office-project • Total investment cost, thanks to data of Expertise • Building costs decomposition: – Carcass (1st fixing) – Techniques – Soft costs (VAT, fees, margin developper) – Estimated, thanks to the experience of Bopro • Residual is the ‘land value’ of the project • Estimated for CBD in 2020 – For 3 time-frames : 2019, 2005, 1990 – For 3 ‘locations’ : CBD, decentralized and periphery. 2020 CBD Land-value/m² 2 985 Carcass-investment/m² 900 Techniques-investment/m² 600 Soft-costs/m² 1 765 39% Totale investment cost/m² 6 250==> verkoopprijs excl. BTW/RR 5 298 1990 1990 1990 2005 2005 2005 2020 2020 2020 CBD De- central Peri- pherie CBD De- central Peri- pherie CBD De- central Peri- pherie Land-value/m² 1 450 459 138 2 496 809 527 2 985 1 090 488 Carcass-investment/m² 700 600 550 800 700 650 900 800 700 Techniques-investment/m² 200 150 100 300 200 200 600 500 500 Soft-costs/m² 900 541 362 1 404 791 623 1 765 1 110 812 38% 45% 46% 39% 46% 45% 39% 46% 48% Totale investment cost/m² 3 250 1 750 1 150 5 000 2 500 2 000 6 250 3 500 2 500==> verkoopprijs excl. BTW/RR 2 745 1 446 934 4 249 2 081 1 653 5 298 2 909 2 049
- 7. III. Own ‘valuation-evolution’ model • Value-evolution hypotheses : – Land: increases with 1,5 x inflation rate (to be discussed) : 1,5 x 1,50 % = 2,25% – Carcass: 50 years (estimation of maximum life time value of office-buildings in Belgium) – Techniques : 15 years – Soft-cost: 10 years • 1st rental contract duration • Gives an evolution of price/value over a 50 years span – Compairable to ‘Property Life Cycle’
- 8. III. Own ‘valuation-evolution’ model Average effects for 3 time-periods (first ten years, 11-20 years and ‘older buildings > 20 years’ 1990 1990 1990 2005 2005 2005 2020 2020 2020 CBD De- central Peri- pherie CBD De- central Peri- pherie CBD De- central Peri- pherie Land-value year 0 1 450 459 138 2 496 809 527 2 985 1 090 488 Carcass : 700 600 550 800 700 650 900 800 700 Techniques 200 150 100 300 200 200 600 500 500 Soft costs (incl. VAT) 900 541 362 1 404 791 623 1 765 1 110 812 Total investment cost 3 250 1 750 1 150 5 000 2 500 2 000 6 250 3 500 2 500 Value evolutions/year: Average 0,2% -1,1% -2,9% 0,5% -0,6% -1,2% 0,2% -1,1% -2,7% Year 1-10 : -1,9% -3,2% -4,1% -1,6% -2,9% -3,3% -1,9% -3,2% -4,3% Year 11-20 : 0,2% -1,2% -2,5% 0,5% -0,7% -1,3% 0,2% -1,2% -2,6% Year 21-50 : 0,9% -0,5% -2,6% 1,1% 0,1% -0,6% 0,8% -0,5% -2,3%
- 9. III. Own ‘valuation-evolution’ model • Calculated ‘averages/year) – For the past (1990 + 2005 / 2) • From + 1,0 % to - 3,7 % – For the future • Higher then in the past • From +0,8 % tot - 4,3 % – Is this real ? Offices in Belgium: historical yearly value-evolution 'calculated' Age Location ==> Average CBD Decentral Periphery -0,9% 0,4% -0,9% -2,0% -2,8% -1,7% -3,0% -3,7% -0,8% 0,3% -0,9% -1,9% -0,3% 1,0% -0,2% -1,6% Offices in Belgium: calculated future yearly value-evolution Age Location ==> Average CBD Decentral Periphery -1,2% 0,2% -1,1% -2,7% -3,1% -1,9% -3,2% -4,3% -1,2% 0,2% -1,2% -2,6% -0,7% 0,8% -0,5% -2,3%Year 21-50 : Average Year 1-10 : Year 11-20 : Year 21-50 : Year 1-10 : Year 11-20 : Average
- 10. IV. Belgian ‘Office-REIT’s’ Evolution of valuation of their R.E.-assets • 4 ‘Office-REIT’s’ in Belgium (Befimmo, Cofinimmo, IOW and Leasinvest) • REIT’s have to ‘revaluate’ their real- estate every quarter – We have calculated this yearly ‘evolution’ in % of the real-estate- value • From 2004 on, we have ‘segmented’ figures of these REIT’s, so we can differentiate this % change pro region.
- 11. IV. Belgian ‘Office-REIT’s’ Evolution of valuation of their R.E.-assets 1995 - 2019 Average Standard- deviation Cofin- immo Befimmo Inter- vest Leas- invest Inflation Bel 20 growth Cofinimmo -0,2% 1,0% 100,0% Befimmo -0,4% 2,2% 72,5% 100,0% Intervest -0,8% 2,1% 68,2% 81,4% 100,0% Leasinvest 0,3% 1,6% 53,4% 68,9% 54,2% 100,0% Inflation 1,9% 1,1% 0,2% 25,6% 18,6% 24,0% 100,0% Bel 20 growth 6,4% 22,1% 31,1% -45,2% -23,2% -23,8% -60,2% 100,0% Correlations
- 12. IV. Belgian ‘Office-REIT’s’ Evolution pro ‘location’ 2005 - 2019 • CBD had an average increase in value of 0,3 % – Compairable to ‘our’ calculated average of 0,2 % • Decentral offices decrease with 3 %/year in value – Higher then our calculations • Peripheral offices have decreased with 4 % pro year on average from 2005 – 2019 ! – Higher the the average calculated (from 3,7 % to 1,6 %) – Partially explainable since most offices are less then 10 to 20 years old • Correlations ‘logic’ – CBD en decentralized – Decentralized en periferie – ?? CBD en other cities Value-evolution offices/year Average Standard- deviation Brussels, CBD Brussels, decentral Brussels, peripherie Other cities Brussels, CBD 0,3% 1,9% 100,0% Brussels, decentral -3,0% 3,0% 51,5% 100,0% Brussels, peripherie -4,0% 2,9% 17,6% 54,8% 100,0% Other cities 0,0% 1,9% 69,3% 20,8% 13,0% 100,0% y = -0,0018x - 0,0081 R² = 0,1679-10,0% -5,0% 0,0% 5,0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Annual value-evolution of offices in Belgium: first estimation Brussels, CBD Brussels, decentral Brussels, peripherie Other cities Gemiddelde Linear (Gemiddelde)
- 13. V. Concluding • The valuation of all offices decrease in Belgium with 1 – 1,5 % pro year • The rate of this decrease is function of ‘location’ and ‘age’ of the building • Further research would be usefull, since the ‘residual value’ will increase in importance for calculating the ‘actual value’ due to the decrease of interest rates and/or yields. Offices in Belgium: calculated future yearly value-evolution Age Location ==> Average CBD Decentral Periphery -1,2% 0,2% -1,1% -2,7% -3,1% -1,9% -3,2% -4,3% -1,2% 0,2% -1,2% -2,6% -0,7% 0,8% -0,5% -2,3%Year 21-50 : Average Year 1-10 : Year 11-20 :
- 14. • Office-market in Belgium – Supply > demand – Momentum 2019 ‘looks’ different – But, long term expecations do fear increasing vacancy – Issue: high ‘yields’ are attracting new investors • Will every real estate market ultimately evolve in a status of oversupply ? 1st reflexion : supply and demand
- 15. 2nd reflexion : intrest-rate evolution • Can the interest rate decrease further ? • Inverse correlation of ‘land value’ and ‘interest rate’ in Belgium • Lower interest rates will increase the importance of ‘residual value’ in valuations.
- 16. Epilogue Toute ma jeunesse, j'ai voulu dire: je sais Seulement, plus je cherchais, et puis moins j'savais Il y a (presque) soixante coups qui ont sonné à l'horloge Je suis encore à ma fenêtre, je regarde, et j'm'interroge Maintenant je sais je sais qu'on ne sait jamais La vie, l'amour, l'argent, les amis et les roses On ne sait jamais le bruit ni la couleur des choses C'est tout c'que j'sais ! Mais ça, j'le SAIS... ! Jean Gabin, 1974.