Comparative Liquidity in Commercial Real Estate Markets

By Steven Devaney, Nicola Livingstone, Pat McAllister and Anupam Nanda

In each newsletter RREF looks to share some of the most recent research from the Centre for Real Estate and Planning Research at Henley. Here our academics share a summary of their recent research into liquidity.

Institutional real estate investors must somehow gauge the liquidity characteristics of real estate markets when choosing where to allocate capital. It is a key consideration, especially given the timeframes, associated risks and significant capital outlay inherent in the sale or purchase of real estate assets. Yet how we measure and price liquidity presents a complex and thorny challenge, as it is a multi-faceted concept with numerous components. Published indicators often track transaction activity either in absolute terms or as a ratio of transaction volume to stock. Yet there are other aspects that concern investors, such as transaction procedures, transaction costs, market depth and time to transact, where information is much sparser.

Our recent research for the IPF assesses liquidity characteristics for a range of international office markets through qualitative investigation of transaction costs and processes together with a quantitative analysis of transaction activity and pricing at the city level. We considered office markets because of the important role they play in international real estate portfolios and the fact that more data is available for this sector.

Transaction costs & processes - Survey findings

Using questionnaires, we focused on variations in market institutions and structures through which prime offices are transacted in different countries. We sought to examine a diverse selection of markets in terms of geography and transparency. A number of clear patterns emerged from the responses received.

In terms of the typical method of sale, a clear split emerged with ‘best bids’ reported by 50% of respondents overall and private negotiation by 43%. However, within these methods, two dominated: non-binding best bids (typical in the UK) and intermediated private negotiation, where the process was managed by an intermediary party. Although there were no patterns relating to transaction methods in developing versus developed real estate markets, cultural influences can often play a key role (for example, Qatar and Kuwait).

Interestingly, the UK was one of only five countries surveyed that uses separate agents for buyer and seller in the commercial real estate transaction process. The most common model was a single agent/broker representing the seller. Brokers for the buyer are considered less essential across the 26 countries we surveyed. 11 countries use a one-broker model where the agent/broker represents the seller only. The overwhelmingly dominant approach for the remuneration of an agent/broker is for the fee to be a percentage of the selling price. It was not a surprise to discover that it was more common for the seller’s agent to be incentivised to maximise sale price. There was no obvious pattern in why different markets adopted different practices. We think that custom and practice embeds brokerage models at the local level that then become entrenched and difficult to change.

Time to transact, incorporating time for marketing, due diligence, exchange and completion was typically 3-6 months and averaged at 22 weeks. No strong patterns between developing and developed markets emerged, with any correspondence between time and maturity being distorted by anomalies, such as India, with shorter time to transact compared to say France or Singapore, which had longer times to transact relative to their transparency levels. Japan had the shortest time to transact period, at 12.5 weeks, followed by the UK (14 weeks). Yet the results for the UK do contrast with earlier deal-level research that suggests 19 weeks is more typical. Furthermore, transaction periods can vary over time, with market conditions and between assets.

Analysis of transaction activity

In absolute terms, the most prominent cities in the global economic hierarchy tended to have the highest levels of transaction activity. London, New York, Tokyo and Paris accounted for almost 50% of office transaction volume in the sample of cities investigated. Essentially, markets with high volumes and strong global rankings tend to have larger pools of buyers and sellers, advisors, assets and information. Consequently, they should, in theory, prove to be more liquid. Yet these were not necessarily the cities with the highest turnover rates. The locations with the highest turnover rates were dominated by cities in the US, Australia, UK and, perhaps surprisingly, China.

RREF_Graph_webThe figure above starkly illustrates the association between transaction activity and pricing across 36 cities in US dollar terms. However, in isolating the effect of transaction activity on prices (yields), a key challenge was to separate out the effects of liquidity from the effects of other factors on office yields. Furthermore, the causal relationship is not clear-cut. Does activity influence yields, or do yields drive volume and turnover? Using a two-stage panel regression model to try and control for these issues, our results suggest that a 100% rise in volumes causes yields to fall by between 10 and 15 basis points over and above any fall that is caused by changes in fundamental market drivers. Note that for many markets, the ‘lumpy’ nature of investment flows means that a 100% rise in transaction volume is not uncommon.

Final thoughts

High transaction costs and extended transaction times mean that investors are faced with significant uncertainties about how much they can buy or sell assets for and when they will receive or deploy their capital. Although the time and costs associated with transacting are at its core, liquidity can be an elusive concept, with its different aspects varying in importance for different real estate investors. Internationally, markets differ in transaction times, costs and processes. Information network effects seem to be key in driving transaction activity and, given their concentrations of investments, investors, intermediaries and information, it is unsurprising that there are concentrations of international transaction activity in the most prominent global cities.

If you would like to know any more about the research at the School of Real Estate and Planning and how to get involved please contact


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