A Regime Switching Approach to Modeling Rental Prices of UK Real Estate Sectors

Real Estate Economics, Vol. 40, No. 1, 317-350.

Posted: 21 Dec 2009 Last revised: 12 Oct 2013

See all articles by Roland Füss

Roland Füss

University of St. Gallen - School of Finance

Michael Stein

University of Duisburg-Essen

Joachim Zietz

EBS University, EBS Business School

Date Written: January 4, 2011

Abstract

This paper uses regime-switching models of the threshold type to analyze the adjustment process of rental prices for three UK commercial real estate sectors over the period 1974 to 2008. The non-linear models outperform their linear counterparts in in-sample fit. Their out-of-sample forecasting ability is better whenever the corresponding linear models contain a significant amount of neglected non-linearity, which is the case in this study for the industrial sector. Switches into other regimes are triggered by past growth rates of rental prices exceeding a threshold level. For both the industrial and retail sectors, this occurs when the growth rates of rental prices push significantly above 2 or 5 percent per quarter, that is, in situations of strong excess demand. For the office sector, the switch occurs when rental rates are falling rapidly, that is, when the sector suffers from strong excess supply.

Keywords: Regime-switching, non-linear estimation, time-varying rental adjustment process, rental cycle, UK real estate market

JEL Classification: C22, G12, L85

Suggested Citation

Füss, Roland and Stein, Michael and Zietz, Joachim, A Regime Switching Approach to Modeling Rental Prices of UK Real Estate Sectors (January 4, 2011). Real Estate Economics, Vol. 40, No. 1, 317-350.. Available at SSRN: https://ssrn.com/abstract=1514286

Roland Füss (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

Michael Stein

University of Duisburg-Essen ( email )

Universitätsst. 12
Duisburg, 45117
Germany

HOME PAGE: http://www.fmoek.wiwi.uni-due.de/

Joachim Zietz

EBS University, EBS Business School ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

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