What sells in a crisis? Determinants of sale probability over a cycle and through a crash

Abstract

Purpose The purpose of this paper is to understand what affects the liquidity of individual commercial real estate assets over the course of the economic cycle by exploring a range of variables and a number of time periods to identify key determinants of sale probability. Design/methodology/approach Analyzing 12,000 UK commercial real estate transactions (2003 to 2013) the authors use an innovative sampling technique akin to a perpetual inventory approach to generate a sample of held assets for each 12 month interval. Next, the authors use probit models to test how market, owner and property factors affect sale probability in different market environments. Findings The types of properties that are most likely to sell changes between strong and weak markets. Office and retail assets were more likely to sell than industrial both overall and in better market conditions, but were less likely to sell than industrial properties during the downturn from mid-2007 to mid-2009. Assets located in the City of London more likely to sell in both strong and weak markets. The behavior of different groups of owners changed over time, and this indicates that the type of owner might have implications for the liquidity of individual assets over and above their physical and locational attributes. Practical implications Variation in sale probability over time and across assets has implications for real estate investment management both in terms of asset selection and the ability to rebalance portfolios over the course of the cycle. Results also suggest that sample selection may be an issue for commercial real estate price indices around the globe and imply that indices based on a limited group of owners/sellers might be susceptible to further biases when tracking market performance through time. Originality/value The study differs from the existing literature on sale probability as the authors analyzed samples of transactions drawn from all investor types, a significant advantage over studies based on data restricted to samples of domestic institutional investors. As well, information on country of origin for buyers and sellers allows us to explore the influence of foreign ownership on the probability of sale. Finally, the authors not only analyze all transactions together, but the authors also look at transactions in five distinct periods that correspond with different phases of the UK commercial real estate cycle. This paper considers the UK real estate market, but it is likely that many of the findings hold for other major commercial real estate markets.