Modelling Urban Commercial Property Yields: Exogenous and Endogenous Influences

The starting point for this paper is the argument that increased weight of money into commercial property in this decade has led to a convergence of UK provincial city office yields. The paper begins by reviewing the concept of a property yield cycle and the notion of a city risk premium, and then considers exogenous and endogenous influences on the determination of urban office yields. This provides the framework for the empirical analysis. The study examines the trends in office yields in the major provincial office centres of the UK over a period of more than 20 years. It reviews the changing city risk premiums relative to the City of London, including their spread, over this period and relates this to the weight of money invested in different provincial cities. This descriptive analysis provides the context for the development of a formal model of local office yields that is tested with a panel regression. The findings suggest that there are some local or fixed effects on yields in different cities and that exogenous investment funds are a significant influence in the short term but not the long term.