What Makes a Rent? A Look Across Global Cities

Speaker: Maurizio Grilli, Group Senior Research Analyst, Grosvenor,  (www.grosvenor.com

After our Lunch on 28th June, your Scribe went to Covent Garden to hear ‘Les Troyens’, the epic opera about the mission of Aeneas to found Rome. I don’t know whether Maurizio will encounter a Dido on the way, and certainly, working for Grosvenor Estates he is not fleeing a burning City. Nevertheless, the task he described for us seems to have similar epic qualities: he is seeking to create a model that will explain the incidence of high rents in offices. Maurizio emphasised that, working for a landowner with long horizons, he is not concerned with what may be seen as volatile ‘noise’, but with the fundamentals of value creation. His ambition is that the model must have global application; I don’t think he mentioned Antarctica, but otherwise truly global – perhaps 500+ cities.

Currently, he is working on four variables which he hopes will be able to explain 60 to 70% of observed long term variation, i.e. variation with the ‘noise’ removed. His variables comprise GDP, Quality of Life, Connectivity and Demand/Supply.

GDP epitomises underlying economic activity; for this he can rely upon hard and extensive data. Quality of Life is more subjective, but is intended to capture the background of personal wellbeing that encourages the development of office-based service industries and capacity. He presently uses Economist Intelligence Unit data. By Connectivity, he is seeking to capture the critical mass of commercial activity, which will, of course, encompass electronic, travel and other forms of business inter-connection. He uses a count of global company HQs as his proxy, and finds this to provide one of the strongest variables. Finally, Demand/Supply. This is likely to be the strongest factor in the background noise, but he tries to see through that by viewing vacancy rates over 20 years. What he is seeking is evidence of long term supply constraint against a background of inherent high demand.

In subsequent discussion, Maurizio conceded that his four variables may not capture all that is required, agreeing, for example, that there are issues about legal security and a low incidence of corruption. As a subsequent thought, are there issues connected with educational standards? But maybe these are captured by ‘Connectivity’. He also agreed that, whilst he was only addressing office rents, a similar approach could well be valuable in other markets.

Maurizio was a convincing advocate of his approach, and there can be little doubt that such model-building should bring valuable insights. Your stick-in-the mud Scribe does wonder whether his clients will have the courage to follow the results he achieves if they stray too far from intuitive prejudice. After all, so-called research in other markets has had poor results for most investors. But it seems clear that Maurizio’s work will be an aid to clarity in what is likely to be a more complex world.

Michael Mallinson