Economics

Assessing the true value of Commercial Real

Estate to the UK economy

29 November 2013

Author:
Dr Savvas Savouri
Prof Richard Jackman
Katie Orlandi

Introduction

Commercial real estate (CRE) is an area which is undervalued and

studied in far less detail than it ought to be. Research that has been
done in the past has been inconclusive and somewhat narrow minded.
There are ways in which property has value that are sometimes not
taken seriously, or even taken into account at all. It is not just the CRE
sector itself that should be examined; it is also the knock on effects on
the other parts of the economy. The aim of the research paper is to
uncover and analyse the true value of CRE, by delving into each of the
different areas of the economy on which it has a significant impact.
Although there will obviously be overlaps with every section we discuss
another point that shows just how valuable commercial property is (it
spills over into almost every part of the economy) we have sorted the
impact of CRE into several themes, in order to make clearer the effect
it has on the economy as a whole.

The purpose of this particular skeleton paper is to give an idea of the

areas that we feel should be explored further in order to uncover the
extent of the value of CRE. It will give an indication to why these
particular themes ought to be examined.

Contact information
Toscafund Asset Management
LLP
90 Long Acre
London WC2E 9RA
England
t: +44 (0) 20 7845 6100
f: +44 (0) 20 7845 6101
e: ir@toscafund.com
w: www.toscafund.com

Economics
29 November 2013

Assessing the true value of Commercial Real

Estate to the UK economy

1. Definition and scope of commercial real estate

As discussed in the introduction, the aim of this paper is to uncover the complete value of
commercial real estate (CRE); in order to achieve this, it is necessary that we first establish the
scope of it. From the local newsagents at the end of the street, to the office buildings with many
storeys, CRE is found in an infinite array of shapes, sizes, and functions. There are, of course, the
main areas of CRE the ones that first come to mind including retail, office and industrial real
estate. However, just as important as these are, there a many other sides to CRE; there is leisure
(such as the cinema or the gym), hotels, pubs and restaurants, garages, and petrol stations.
Furthermore, student accommodation, hospitals and schools can all be counted as CRE. Thus, the
definition and range of CRE can be so broad and complex, and it is, in part, this which makes the
value of CRE worthy of further study. The issue is that research done before, and even data found
on government websites, each use a different idea of CRE. The first step of this research paper
would be to put down a clear definition of what we include in the term commercial real estate.
From this, it will be significantly more straightforward when we come to analyse the impact of CRE
on the rest of the economy.
As well as CRE itself, it is important to define the activity that surrounds it, whether it be
construction, management, development or design. It is not just the outward impact that CRE has
on the economy that is important, but also the inputs that go into it; these will, themselves, have
their own effect on other sectors (as we will see in the next section). Therefore, we will also provide
a definition of what we understand to be counted as CRE activity. There is no use in examining the
value of CRE if we are not sure of how we would describe it.
One of the initial steps taken will be to study the functions of commercial property; it is this that will
lead us towards finding its value. To start with, we will look at the volume of CRE in the UK and the
value that is given to it, in its most basic form. By identifying the capital gains that are made from
CRE we can start to form a picture of how it is valuable in itself, as a physical structure. Table 1
gives an idea as to the rateable values of the different types of CRE, coming together to give a
value of almost 49bn. By looking at the changes in floorspace compared to the rateable value per
m2, we can begin to get an understanding of how CRE has become more and more valuable over
the years (Chart 1). In terms of the functions of property, it is worth exploring the different uses of
CRE and the ratios between them. For example, although we can see how CRE is divided into
sectors (Figure 1), it would be interesting to see how these relative sizes have altered over the
years. Part of the reason that CRE is valuable probably the most obvious reason is because it
holds a function that is usually vital to those who use it (this is a point we will return to in later
sections).

Table 1: Commercial property, 2008

Chart 1: Value of commercial property

Floorspac
e
(000m2)

Rateable
value
(000)

Per
m2

Retail
premises
Commercial
offices

106,299

13,620,583

128

84,073

10,607,580

126

Other offices
Factories
Warehouses
Other
bulk
premises

17,383
208,171
158,942

1,440,362
5,942,502
6,219,548

83
29
39

20,681

641,683

31

13,394

610,238

46

595,549
608,943

38,472,259
48,702,578

65
64

Bulk Classes

Non-bulk
premises with
floorspace
All
bulk
classes
Total

Source: DCLG, Toscafund

Economics

Assessing the true value of Commercial Real

Estate to the UK economy

29 November 2013

Figure 1: Commercial real estate sectors,

2011

Source:IPD through BPF, Toscafund

The areas discussed above are, most definitely, important factors which contribute to the value of
CRE, and, therefore, they should not be skimmed over, but looked at in great detail; they show the
value of property in the most basic form. However, the point of this paper is not just to show the
function of CRE, or its scale, but why it is so important. The topic of CRE has not yet been examined
in enough detail to show what it adds to the economy, both directly and indirectly. This research
paper will show that the impact of CRE is much bigger than what it may first seem.

A day in the life of...

To grasp a sense of the sheer size of the commercial real estate industry, one only has to look at how it is
used in everyday life. For example, you could follow a day in the life of...

a. ...A student
A typical student these days will wake up mid morning, just in time for their 11am lecture in one of the
newly built university buildings, before which they will grab a coffee from a cafe, be it chain or local, to
keep them awake. After the lecture, they will probably pick up some lunch from the supermarket, before
going to the library to continue working. It may be that at 5pm they go to their part-time job, working in
the local leisure centre or at a retail store on the high street. Or, they may decide to meet their friends to
watch a film at the cinema. Later on, the group will go for a drink or two at the pub in the city centre,
after which they will go home to their student accommodation to sleep.

b. ...A professional
Getting up at around 6am, a city worker may decide to go to the gym before heading to their desk on the
23rd floor of the office building. Come lunch time, they could choose to eat in one of the nearby
restaurants, or go to a deli before heading back to the office. On their way home, they may run into the
supermarket to pick up food for dinner, or meet their colleagues for a cocktail in the restaurant of a hotel
in the centre. They could even take their family to watch a show at the theatre, or visit an art gallery with
a friend.

Just by looking at how much CRE is used by the average person on their average day, you can start to
have an idea of its scope. This is one way in which we could start to convey how essential CRE is to the
economy, and why this means that its value is actually much more than what it appears to be at the

Economics
29 November 2013

Assessing the true value of Commercial Real

Estate to the UK economy

2. Inputs of commercial real estate

In the chapters after this one, we will move on to the outward impact of commercial real estate
(CRE). However, as mentioned earlier, the factors that go into CRE are equally as important when
measuring its value. This section will cover these inputs and how, although they may be seen as the
costs of CRE, they are, in fact, contributing to the economy themselves, be it directly or indirectly.

Owners of commercial real estate

As much as it is necessary to explore the types and functions of CRE, it is also imperative that we
take time to establish who the owners of the property are. These can vary from owner occupiers, to
private investors, to real estate companies. The owners are significant because they are the ones
who are taking a risk by putting up the capital to fund the property. The reason that we must take
the owners into account when considering the value of CRE, is that they are the ones who receive
the physical returns from it; it is not just the value of these returns that we should be interested in,
but what they are used for, or where they are invested from there. For instance, they may choose to
invest it into further development, or they may decide, instead, to put them into other areas of their
business. This is an area that is worth being looked at in more detail, because it will be providing a
boost to the economy indirectly.
Real estate a return of fundamental 'good' investors
A highly controversial concept in commercial property is the identification of 'good'
owners. This is a notion that will of course split opinions. So as to make matters
easier, and narrow room for disagreement, let us attempt to at least characterise
'less than good' owners. In this group there are of course absent landlords and those
who see their ownership as fleeting. There are those no simply unfamiliar with the
British market but unwilling to understand its particular nuances. Owners who
introduce risk are of course those who are heavily encumbered, deeds not in their
hands but their lendors, opening dangerous channels for contagion and adverse feedback from shocks elsewhere. Another such channel is currency mismatch, where
ownership of British assets is in the hands of those whose ultimate currency of wealth
measurement is not sterling and complicated if they are borrowed in another specie.
Were these risks not enough there is duration mismatch where funding for ostensible
long-term ownership is achieved through short-term borrowing.
With this in mind we can revisit who might be considered 'good' owners. Long-term
local investors. Let us be clear the identification of good and bad owners is less about
legislating to preclude the later group as warning when their representation grows to
a point they introduce at the margin short-termism, duration or currency mismatch,
or at worse, all three. Like a recipe it is about ingredients and being aware when the
dish is ruined if over-spiced.
In the future we see for Britain's commercial real estate, we anticipate a return of
traditional investors; pension and life funds who portfolios having been lightened of
British real estate will be ballasted anew. This is not to claim overseas owners will
depart, but rather change in their nature. In place of absent foreign owners we
confidently anticipate a breed of owner-occupier, with long-term ambitions and longterm funding, if leveraged at all.
We began this section with the vexing question of what makes for a good or bad
property owner. We hope to have created a sense that Britain's commercial real
estate will see a return of the former.

Construction
There are several sectors that rely directly on CRE, the most obvious of these being the
construction industry. It may be a factor going into CRE, but construction is also obviously reliant on
it, as, without the development of CRE, the value of output of construction is substantially lower
(See chart 2). This industry and a sizeable industry it is is dependent on CRE; this is just one way
of showing how it has a direct impact. What is important is not just the benefit that CRE brings to
the construction industry, but also the positive impact that these benefits have on the rest of the
economy.
Construction not only involves the actual constructing of the building, but also the whole process
and supply chain that leads up to it; much of the demand for raw materials comes from the
construction of CRE. This should be measured clearly, as at each step of that process, the output
4

Economics
29 November 2013

Assessing the true value of Commercial Real

Estate to the UK economy

produced is having a positive effect on the GDP. On its own, construction of CRE is providing 6.3% of
Gross Value Added (GVA) for all industries, and providing 7.4% of total output (see table 2). If we
were also to take into account the wider involvement in construction, these figures are surely to be
significantly higher; thus, it is imperative that we measure the process of construction as a whole.

Chart 3: Construction and real estate

employment

Chart 2: Value of construction

Source: ONS, Toscafund

For the research paper, we will demonstrate the extent of the dependency of construction on CRE,
and, in doing so, will show one way in which CRE is contributing to the economy. Thus, we will look
further into the process that leads to a construction of CRE, and how much of the output produced
at each part of the chain is due to CRE. Moreover, we will analyse how this output is creating gains
for the economy.

Real estate activities

Of course, what has just been
discussed above all involves the
Multiplier Effect
development of new CRE, however, it
The idea of a multiplier effect created through CRE is
is just as, if not more, important to
one we will often return to throughout the research
look at the direct impact of the CRE
paper. It is the way in which the value of CRE spills over
that already exists. The industry that
into each different part of the economy. For example,
is affected most directly by the
each of those employed, be it in construction or in real
existence of CRE is real estate
estate activities, are providing an increase in
activities. As with construction, it is
consumption which will benefit the businesses they use.
not the benefits that CRE provides to
From this, there will be knock on effects that lead to a
the real estate activities industry that
strengthened economy with a boost in investment. By
we are most concerned with, but the
analysing this multiplier effect, we can generate a
knock on effect that this has upon the
clearer understanding of the role CRE holds in the wider
rest of the economy. Again, real estate
activities provide 9.7% of total GVA and 7.5% of total output; both showing its potential to have a
large impact on GDP levels. By tracing the contribution of construction and real estate over the
years (charts 4,5,6) we can look for patterns to indicate how their contribution to the economy may
follow in the future. There are other areas of the role of real estate activities in the economy which
ought to be examined; for instance, transactions made in the sector, and the tax revenue gained
from these transactions through Stamp Duty Land Tax (SDLT) which brought in 6,907m in receipts
through the year 2012-13 (Source: HMRC). Like with construction, the reliance of real estate
activities on CRE ought to be measured properly, as real estate activities have a significant impact
on the economic accounts, and this is an industry that would suffer were CRE to also suffer.

Employment
This is an input to CRE that needs particular attention, because it is an area that has such a
significant impact on the state of the economy. The labour market is directly affected by CRE and its
success; from those who work on the construction site, to the architects who design the building, to
the realtors who sell it, there is a broad spectrum of those who rely on CRE for employment. What is
more is that activities surrounding CRE provide relatively stable levels of employment (chart 3),
which boosts confidence, the impacts of which we will discuss in a moment.

Economics
29 November 2013

Assessing the true value of Commercial Real

Estate to the UK economy

One factor of employment surrounding CRE that we will focus on is its compatibility of skills. What
makes CRE more valuable, in terms of employment, is that it provides an opportunity for
employment for the lower skilled; this is especially important for any government objectives
concerning rebalancing. It is an area which enables training, which then leads to the development
of skills that are transferable, all of which are essential for improved productivity (an area which will
be discussed later). For example, the activities involved in CRE can provide employment for
someone who has not been to university; and so, even though they are developing skills and adding
to output, there has not been the same cost of education. Thus, it seems important to explore
employment surrounding CRE, not just in terms of volume, but also type.

Chart 4: % of gross capital formation

Chart 5: % of output of basic prices

Source: ONS, Toscafund

Chart 6: % of gross
value added

Economics
29 November 2013

Assessing the true value of Commercial Real

Estate to the UK economy

3. Commercial real estate in production

Now that we have covered the inputs of commercial real estate (CRE) and its direct impact to the
economy, it is time to look at how CRE has an indirect effect as well. Throughout the remaining
sections there will be more of a focus on the welfare economics of CRE, and we will look at the
areas of the economy which have, in the past, often been overlooked when examining the value of
CRE. The first area we are going to analyse the role of commercial property in production.

The value of the physical structure

We aim to explore the value of the physical structure itself, in terms of being an input to a
production function. Production itself is a crucial part of the economy, but there are factors behind it
which dictate its success. Almost every part of production, if not all, relies on some form of CRE in
order to be able to perform its own function in the supply chain, making it one of the most
important factors of production. By studying a supply chain, and its reliance on CRE, it is possible to
show more clearly how CRE is even more valuable when looked at collectively. Were one link in the
chain to lose the physical structure in which it houses all of its activity, it would either be very
unproductive or fail completely; this missing link would then mean that the whole production
process would fall apart. It is not often taken into consideration how vital CRE is to the success of
production, because it may not be something that is particularly noticeable next to the raw
materials or the labour employed, however, its impact is much greater than many would think. The
aim of this section of the paper is to find a way to express how big a role CRE plays in the
production function and, in doing so, we can show its value in other areas of the economy. Before
even looking at the income generated from CRE etc, we are able to demonstrate how it is creating
gains for the economy, just by being there.

The evolution of commercial real estate

It is not really possible to grasp a sense of the value of CRE in the current day without looking into
its past. The research paper, therefore, will take some time to express the evolution of CRE in order
to show how it has become ever more valuable over the years. In the past, there was very much a
binary relationship between a property and the industry it served; it had a particular function, and
was usually designed for this function alone. The problem with this was that, in only being able to
serve one purpose, for a specific industry, were that industry to fail, the income of the property
would be 0. The design of CRE meant that it could usually be transferred for use, which meant that
it became a waste when its function was no longer needed; it was too dependent on its industry.
The difference between then and now is that now, with the improvements and investment in CRE, it
is possible to have the best of both a property can be very specific, or hold a particular purpose, if
it needs to, but it is also possible to have multi-use buildings, or ones that can be easily adapted to
fit a different purpose. An example of this can be seen in buildings that are developing so
residential and commercial real estate are being to integrate more this is all providing a more
efficient use of space. Through the exploration of this idea, we can exemplify the value of CRE,
because its diversification means it can adapt quickly to changes in demands, helping the economy
remain stable through the changes.

Economics
29 November 2013

Assessing the true value of Commercial Real

Estate to the UK economy

4. Occupiers of commercial real estate

This section will focus on how commercial real estate (CRE) is valuable because it has a function.
Occupiers are such a significant area when evaluating the value of CRE because of how much they
rely on it and what they, in turn, contribute to the economy due to their use of the CRE.

Types of occupiers
In order to grasp the extent to which the occupiers
Farming
rely on CRE, we will first look into who those
In terms of occupiers of CRE there is a
occupiers are, and what it is that makes CRE vital to
their ability to function properly. For most, if not all,
tendency to think more of businesses and
corporations; In fact, we tend to only think
occupiers, CRE is so valuable because it provides the
structure from within which they can perform their
of those. However, if we want to uncover
the complete value of CRE, we must take
functions; take a hotel owner for an obvious
example, they cannot possibly provide their service
all types of occupiers into account. Take
farming, for example livestock are also
a room to stay in without the building to put the
room in.
occupiers of property. They rely on real
estate as much as any business or
This section of the paper will not just focus on how
corporation; there needs to be somewhere
CRE is valuable to its occupiers, but also how these
to hold the animals that are a crucial part
occupiers can contribute to the economy due to the
of the agricultural industry. This is not to
use of CRE after all, it is the CRE that enables them
mention the machinery and equipment
to carry out their function. Occupiers add to the
that also needs to be stored in a secure
economy in several different ways; for instance, they
property. By looking into the full spectrum
produce output, they provide employment and they
of occupiers, including those that are less
provide the services necessary for the economy to
obvious, we can gain a more rounded
continue functioning properly. The aim would be to
identify the extent to which the benefits that the occupiers provide the economy with are owed to
the use of CRE.

How vital it is
A way to measure the value of CRE in terms of occupiers would be to look at how much they are
willing to pay to rent the building, or even just a part of it; this is especially relevant when looking at
the competitiveness for prime locations. The rateable value per m 2 of the different types of property
begins to give us an idea of just how valuable the CRE is to its occupiers (See table 1). However, it
is worth looking further into this as it will help to measure how much CRE impacts on the output of
the occupiers. A point worth mentioning is that CRE can provide some stability to the occupiers,
especially in terms of costs, that they may not find in other areas of their business; this is another
factor that could be included when examining the value of CRE in these terms.

Economics
29 November 2013

Assessing the true value of Commercial Real

Estate to the UK economy

5. Commercial real estate in further development

When we talk of construction, we are obviously talking about new property and development in the
industry. However, this further development relies on commercial real estate (CRE) itself, whether it
be through direct funding, or through investment as a result of the capital made on the CRE. This
section provides an opportunity to explore the role of CRE in development; this is one of areas in
which the value of CRE is often overlooked or underestimated.

Infrastructure
There are two main ways in which funding for infrastructure can stem from CRE. The first is directly
this can either be through the investment of the capital that is created through the CRE, or it can
be through the tax revenues generated from it. One example of this process is the Community
Infrastructure Levy paid by new developments; the revenue from this levy is fed into further
infrastructure, which adds to the capital gains that come through property. This is also a good
example to use for showing how CRE can aid the achievement of government objectives, as the
levy can be used for particular infrastructure that may be necessary to keep up with the economy,
for example roads, schools and hospitals. The other main way that CRE funds further development
is through those who invest in property, but this is a point we will return to in a later section.
The value of CRE can be exemplified through the identification of the origin of funding for new
infrastructure. Figures show that 64.83% of funding comes from the private sector this is a value
that we would examine in more detail in order to get a clearer idea of how invested the private
sector are in developing infrastructure, including CRE. Their investment is arguably because it is
them who feel the direct benefits of this infrastructure (owning 78.25%), and the increased
potential output that accompanies it. We feel the percentage of funding from the private sector will
increase as CRE proves to be a strong investment, and something that is essential for the sector.
This infrastructure provides an opportunity for development without the inflationary pressures. In
order to show the value of CRE, we will show how it can boost infrastructure, which in turn will raise
output through its direct contribution to the GDP, but also through raising activity levels in other
sectors.

Productivity and sustainability

One way in which Commercial Real Estate is vital to further development is its contribution to
higher productivity levels. Raised productivity is essential for increases in output and GDP growth; it
means making the most of the scarce resources that we have at our disposal. It may be argued that
the most important step for productivity in the UK is improvements in technology, skills and
logistics etc. However, this is of no use if there is not the appropriate property to house it.
This has been the same throughout history, with the ideal example of how CRE increases
productivity being the process of food industrialisation. This is a significant step in the improvement
of the production process that has lowered costs and raised standards across the food market. Of
course, some of the main contributors to food industrialisation are improvements in the technology
and machinery involved in the supply chain. Yet, these changes would not be half as effective
without the specialised properties to support it. For instance, the new machinery and technology
needed to be held in warehouses/factories, while the genetically modified food relied on the
buildings that provided the specific conditions necessary for its success. We could use examples,
such as this one, as a way of illustrating how CRE has always been essential to improvements in
productivity, before showing how this pattern will continue into the future.
The other task in this part is to exemplify the role that CRE holds in sustainability. For this, we look
into how CRE provides social capital in its development.
It is not an exaggeration to argue that its commercial real estate is contributing
considerably more than its transport sector to improving Britains carbon footprint. In
the first instance Britains buildings are increasingly environmentally friendly. In the
second their modern development and geographic spread is facilitating travel for
work and leisure over shorter distances, and so helping to reduce demands on
Britains transport infrastructures and its carbon emission.

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Assessing the true value of Commercial Real

Estate to the UK economy

Contribution to the Exchequer

As well as looking at tax in terms of regional rebalancing, we will include a section on the total
contribution made by commercial real estate to the Exchequer. This will comprise of both direct
property taxes and indirect taxes, including corporation tax, VAT, income tax and capital gains tax.
For the indirect taxes we will use weights to calculate their figures, looking to find a more accurate
measure of their contribution. Once this value has been found, it can be measured against, and
compared with, other sectors to get a clearer idea of the significance of CREs contributions.
The challenge of calculating just how much its commercial real estate contributes to
the UK economy generally, and its Exchequer specifically, will quite frankly never be
accurately solved. Indeed, the challenge only increases in tandem with the rise in the
number of channels which feed-out of the commercial property market. This said we
must make an attempt at a reliable estimate, but with one caveat. The figure we
suggest will be a lower bound to the true number. It has to be a lower bound because
economic multipliers are easier to miss than to see. And it will be a lower bound
because where we do identify channels and multipliers we are certain to understate
their quantum.

10

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29 November 2013

Assessing the true value of Commercial Real

Estate to the UK economy

6. Scotland
7. Regional rebalancing
The topic of regional rebalancing, and commercial real estates (CRE) role in it, is one that has been
rather overlooked in past research. The subtlety of CREs role in rebalancing means that people
often fail to acknowledge it or measure it properly, even though it is a more than significant way in
which its true value can be demonstrated. It is one of the first areas that is making steps towards
the localisation that provides a rebalancing that will, in turn, bring huge benefits to the economy in
the long term.
For its part Britain's commercial real estate has become much less regionally
distinct, its fungibility helped in large part by the considerable growth in service
sectors whose locations are not rooted to a particular region. From education across
to business services location is governed by financial expediency not availability of
an essential localised resource.
Britain's much altered real estate landscape is not simply helping in its speedier interregional adjustments it is also accommodating (quite literally) for international
migrants and allowing them to settle and prove economically productive widely.

Taxation
This is the most direct way in which CRE is promoting regional rebalancing. For instance, if we were
to consider regional rebalancing in terms of infrastructure, it can easily be demonstrated how CRE
helps to enable this. As mentioned earlier, the Community Infrastructure Levy (CIL) ensures that the
gains from new developments provide for new infrastructure. The levy being localised means that
the revenues made are used to benefit the local economy.
Through handing more responsibility to local authorities, in terms of taxation involving CRE, it is
providing them with the opportunity to use the revenues in a way that will aid the development of
the local area the most. This means that each area can benefit more than if the government were to
continue with a one size fits all attitude to taxation. Thus, we will spend some time examining the
areas of taxation that are localised, including CIL and Stamp Duty Land Tax, in order to show the
extent to which CRE is leading the way in regional rebalancing. Table
Furthermore, it would be worth taking a look at other areas in which local authorities are being
given more leeway in terms of CRE. For example, one area to look at in more detail would be nondomestic ratings, for which local governments have control over. This will become the case more,
and more, often in the future, as other areas of the economy follow the lead of CRE.

Table 2: Transactions and SDLT of commercial property,

2011-12

North East
North West
Yorkshire & The Humber
East Midlands
West Midlands
East
London
South East
South West
England
Wales
Scotland

Number

Million,

3,145
10,315
7,450
6,560
8,100
8,545
16,645
13,815
9,565
84,150
4,305
7,985

1,335
5,685
5,620
4,205
3,970
5,060
26,860
9,600
5,205
67,540
2,320
5,635

11

Yield, %
45
145
95
85
110
125
745
235
125
1,710
60
120

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29 November 2013

Assessing the true value of Commercial Real

Estate to the UK economy

Northern Ireland
United Kingdom

2,025
98,465

595
76,090

15
1,910

Source: HMRC, Toscafund

Geographical knock-on effect

As well as focusing on taxation, we must spend time measuring the general effect that CRE and its
development has on its surrounding community. Cities outside of London are beginning to show
stronger growth, and this is being reflected in the volume of CRE in each area. The impact that this
added property has on the area around it is what this section of the paper will attempt to measure.
This can be achieved through piecing together a geographical knock on effect of CRE in the region.
The increased construction, along with the occupiers of the new buildings, increases the regional
employment levels. As we have mentioned before, these employees are also consumers who create
a multiplier effect, boosting business activity in the area. We would also need to take into account
the added investment through the capital gains from the new CRE, and the benefits that are due to
the increased attractiveness of the region as a place to bring your business.
Regional rebalancing is an area which should be taken seriously when attempting to measure the
value of CRE. It is a move that is essential for economic growth, and it relies heavily on CRE to push
this forward. It is for this reason that the research paper will have this as a theme.

Co-location
The purpose of this section is to show how the value of commercial real estate (CRE)
accumulates when there is co-location. By examining how the role of CRE changes depending
on its location, we can further show how valuable it is to the businesses that use it.

Connected and collectively

When businesses are located near to each other they can benefit from agglomeration; the
ability to co-locate is essential for the function of production. However, although this may be
an obvious point to make, it still shows the critical role that CRE plays in the economy
businesses cannot co-locate without the CRE to locate to: they are not going to benefit without
the property there. This point just exemplifies the value of CRE as it is underlying areas of the
economy such as this. Manufacturing, commercial retail, industrial farming these are all
areas which rely on co-location in order to be productive, and this co-location relies on the
CRE.

The value of land

One point of view to look at the value of CRE from is to approach the subject of the value of
land. What is the value of the land without real estate on it? In its bare state, land is
indistinguishable from Lincoln to Lancashire to London what makes it different, and what
makes it desirable, is the real estate that is developed, or has the potential to be developed. It
adds value to the land by giving it potential and making it useful; it means that the land is

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8. Commercial real estate and investment

Investment, linked with commercial real estate (CRE), is an area that has been researched and
measured more than some others. However, these measurements mostly focus on market returns,
instead of investigating how these returns can be utilised.
The purpose of this section would not be to demonstrate how investment is good for CRE, but rather
how investment relies upon CRE, and how CRE is a strong asset to invest in. The benefits of
investment in CRE would be analysed but this would be in terms of how CRE is where the benefits
stem from.

Types of investors
In terms of investment, a good way to measure the value of CRE is to look at it through the point of
view of those who invest in it, whether it be a private investor, a UK institution, or a listed property
company. The significance of CRE in investment is its ability to provide a (relatively) secure asset to
invest in. This is particularly important for investors such as pension funds which rely on CRE to
provide security for the future. For instance, take an individual who wanted to invest some money
for when they retire. They are often not capable of investing individually, or if they do the returns
are likely to be low. So, the other option would be to put their money into a collective scheme, like a
pension fund, where they know that it would be invested in stable assets such as CRE.
Another benefit for investors in CRE is that they can choose to be open to either direct or indirect
exposure to the property itself; they can be directly involved, by purchasing and managing the
property themselves, or indirectly, through the use of a Real Estate Investment Trust (REIT). This
degree of control is something that distinguishes CRE from other assets used in portfolios. The aim
of this section of the paper is to clarify how the security of CRE, as an asset, adds to its value, by
looking further into the reasons why people choose to invest in it, and how much more they invest
in it because of such reasons.

The returns
Though this is an area which may show the value of CRE in a more obvious way, it does not mean
that it should be overlooked. Firstly, the market returns on CRE are a significant part of the measure
of its value. Although, it is not just the market returns themselves that show the impact of CRE on
the economy, but also how these returns are utilised to bring about economic gains. This is
something that would need to be explored fully in the paper. For instance, we know that part of
these market returns go into further investment in infrastructure this is going to create a multiplier
effect through the increased levels of outputs and employment created, along with the capital
gains, which will again go into further investment. By establishing the pattern of the multiplier
effect and giving a measure of the extent of it, we will be able to give a clearer image of how
valuable CRE is in terms of investment.

Tax regimes
One part of investment in CRE that should definitely be looked at further are the tax regimes that
surround it. An area that needs significant consideration is Capital Gains tax; this tax provides the
main revenue in terms of investment. The unique tax system involved in investment in CRE is worth
investigating as its revenue can be used to promote economic growth, and so it is a measure of the
role of CRE in the economy.

The portfolio
When uncovering the value of CRE, and its link with investment, we need to establish how investors
measure the strength of their portfolio, and how this is reflected in economic accounts. The value
portfolio is usually either by income receiving or by capital formation; depending on which
measurement is used in analysing the value of CRE, there will be different outcomes. For example,
if we look at IPD property index below, you can see the difference in income return and capital
growth.. Thus, it is necessary for this paper to establish which measure of the portfolio gives a
clearer idea of its value, before we can measure its impact on the rest of the economy.

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9. Commercial real estate and banking

As banking sector is such a significant area of the economy, it is imperative that we demonstrate
commercial real estates (CRE) close connection with it; this is, of course, CREs use as an asset for
individuals and corporations to lend against. This paper will be focusing on corporations as they are
the ones more likely to lend against CRE rather than residential property.

Corporate balance sheet

Even before looking at its role in the banking industry, we can see one aspect of the value of CRE
when giving attention to the corporate balance sheet. The corporate sector as a whole is a large net
borrower, but CRE, as a non-financial asset, is one of the largest on the sheet, after dwellings and
other structures (see table 4). It provides firms the stock of wealth to offset the negative impact of
their financial liabilities. Value of CRE for corporations can also be found in the stability it provides
compared to others of its assets, such as its financial ones. The idea of the corporate balance sheet
is one worthy of further analysis in order to uncover the value of CRE for corporations, and how it is
used (other than for lending) to create further capital gains.

Table 3: National Balance Sheet, 2012, billions

Total
Economy

Non-Financial Assets
Dwellings
Non-residential
buildings
Other structures
Machinery
and
equipment
Cultivated assets
Intangible fixed assets
Inventories
Intangible
nonproduced
assets
Total
non-financial
assets
Source: ONS, Toscafund

4,446.50
774.2
908.8
735.4
203.7
62.1
260.9
24.7
7,416.30

%
60.0
10.4
12.3
9.9
2.7
0.8
3.5
0.3

Commercial real estate lending

The stock of wealth that it provides means that CRE gives firms some leeway to borrow and invest
more; it allows its owners to withdraw equity from it equity which can then be invested elsewhere,
whether it be in property or not. This investment then raises the capacity ceiling whilst also
lowering inflation; this in turns lowers the cost of capital and encourages more investment. The
particular attraction of CRE as an asset to lend against is its physicality and reliability; it is a
relatively secure asset.
Furthermore, lenders can us e their part of the appreciating CRE assets to lend even more against;
this ought to produce a virtuous cycle of increased economy activity and investment. However,
there is a significant threat of a vicious cycle if prices fall, and this is what happened during the
financial crisis of 2008. It cannot be denied that property held a significant role in the crises of the
past decades. At the same time that banks were being rather generous in terms of lending, there
was (an influx of) foreign capital with a lower interest rate. This ought to have strengthened the
value of the pound through the attraction of capital, but, in fact, currencies strengthened against
the pound, making loans cheaper for foreign investors. The onset of large swings in the value of
property meant huge losses on commercial real estate (CRE) lending.
The point that needs to be emphasised is that it was not a fault of CRE that caused the issues
involved in the crisis, rather, it was the actions of the banking sector involving CRE. These problems
have been addressed and resolved, and lessons have been learnt; for example, the improvements
to banking supervision that have been initiated since the crisis. What the paper will demonstrate is
that, when CRE is used correctly in the banking sector, and the economy as a whole, it will provide
great returns. As confidence rises again, we are witnessing the re-emergence of demand for credit,
and CRE lending. Now that we have been alerted to these risks, we need to show how property can
be used to the advantage of the economy; the aim of this paper is to do exactly this. We will

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analyse the extent to which lending against CRE in particular creates a multiplier effect through
investment and increased economic activity.

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10. The global economy

The final theme we will cover in the paper is commercial real estate (CRE) and its link with foreign
investment. By exploring this broad topic we will be able to provide a clearer idea of how valuable
CRE is in terms of its contribution to the UKs position in the global economy.

The Balance of Payments

CRE is the ideal area for foreign companies to invest in the UK; it is a relatively stable asset which
can directly benefit its investors, either through the income they would receive from it, or as
somewhere for them to be based. The value of CRE can be shown in two ways regarding foreign
direct investment (FDI); firstly, through the scale of foreign direct investment in it, which can give
us an idea of why CRE in particular is so desirable, and secondly, the benefits that come due to the
investment in CRE. Looking at chart 7, we can see how the volume of FDI in property is on the rise.
These benefits can most obviously be seen in the capital account of the Balance of Payments, but
their impact goes much further than this, and it is this part that needs more consideration. In the
paper, we will analyse the extent of the impact of this investment on the UK economy, whether it be
through foreign investors being involved in the development of the CRE themselves, or whether
they choose to occupy the building. Whatever the way the investment comes through, there will be
significant economic benefits, and it is these that we will focus on establishing.

Chart 7: FDI in holdings of UK property

Source: ONS, Toscafund

Capital and foreign reserves

When we look into capital in terms of the role of CRE in the global economy, it will not just be
through the impact on the capital account. One of the advantages of FDI, especially in CRE, is that it
allows us to enjoy the benefits of new and improved CRE without using up our capital in order to do
so. This means that the capital we save can be used elsewhere, to make improvements and
developments in other sectors and areas of the economy. This demonstrates the value of CRE
because it is an asset that has the ability to attract this foreign investment in the first place. This
section of the paper will be aimed at analysing, both how much capital is saved through foreign
investment, and how this capital is used to boost the economy. This will then bring forward the
aspects of CRE that make it so valuable.
The other part of this section will be focused on the role of CRE in foreign reserves; the strength of
CRE as an asset in the UK is pushing up the value of the in foreign reserves. However, the impact
of CRE is currently not being taken into account when measuring the value of the in these terms.
This is something we believe ought to be worked on, and by uncovering the impact of CRE, we are
finding yet another way in which it is adding to the economy, and, in doing so, we are showing
another valuable area of CRE that has thus far been underestimated.

Business in the UK
The final expression of the value of CRE comes from its ability to not only keep businesses in the
UK, but also bring assets back onshore, as well as attracting businesses from abroad. CRE is an area
which provides an opportunity for expansion and relocation of companies, and through this we are
expanding the capacity for business based in the UK. This is all safeguarding tax revenues and
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improving employment levels, whilst also leading to a rise in UK competitiveness and its attraction
as a place to invest. Furthermore, CRE is presenting an chance for the UK to strengthen its ties with
other nations something that will benefit the economy significantly in the long run, and so should
be analysed properly.

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11. Conclusion
We split this conclusion into two. To begin we reprise what we estimates as the contribution of its
commercial real estate to Britain's economy; providing a new more comprehensive measure than
has existed until now of what it adds directly and indirectly to GDP. In the second part we
summarise what we expect to unfold over coming years.

1. The real estate contribution to Britain's economy

We have sought to calculate what we feel is a credible measure of how much Britain's commercial
real estate has and continues to contribute to its wider economy, not only first order but once and
twice removed income iterations that would crucially not be possible without it.

2. Thinking real in 20/20

Whilst it is negligent to peer into the future for commercial real estate without accepting it is staring
through the fog of uncertainties, failing to try and judge what is most likely beyond these is no less
negligent.
After all, the period from development idea, through planning and construction to completion is of
such length short-term forecasting is simply not long enough. So what might be expect to see in
2020?
Let us collect our thoughts. We have suggested that with time ownership of Britain's commercial
real estate will have largely reverted to traditional investor types; income seeking British pension
and life funds and owner occupiers. We believe the latter will interrupt and reverse a process which
had been accelerated by the private equity inspired separation of operating, 'op' from property,
'prop' companies. And amongst the latter group we anticipate overseas owners to become
increasingly represented.
Alongside developments in its ownership we believe Britain's commercial real estate will be
instrumental in narrowing regional economic variations, not so much reining London back as
providing the means for wealth diffusion. Elements of this will include a growing share of
commercial residential (private rental) allowing labour mobility and regional property taxes
encouraging business migration. We also anticipate growth in regionally spread and real estate
hungry growth sectors (notably education) to encourage expansion where land and property is most
affordable.

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Toscafund Asset Management LLP

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