PROPERTY SIZE EFFECT: SOUTH EAST UK OFIICES 1983-2005

The ësize effectí is a concept studied across various financial asset classes. It describes the relationship between investment performance and a measure size. In the equity market, this involves the shares of smaller capitalised companies delivering higher total returns than shares of mid- and high capitalisation. The underlying theory is that investors demand a 'liquidity premium' as they take the additional risk of not being able to trade at the stated quoted price. With individual property assets, it can be argued that the situation would be reversed. Investors are more able to trade small assets, drawing on a wider range of potential investors, than chunkier, infrequently traded properties. This ëliquidity premiumí should be priced into property yields as investors demand a higher premium to compensate for the liquidity risk. This is of particular relevance in the current ëhotí and liquid investment markets, where yield differentials have decreased as investors have accepted lower risk premia across the board. This paper analyses the performance of all offices traded in the South-East UK market over the period 1983-2005. It separates the various value bands into subgroups of yield bands, and traces the movement in yields across different lot sizes through time. This research draws on the uniquely constructed IPD/Gerald Eve transactions database, containing the performance of some 20,000 properties over the period 1983-2005.