Real Estate Activities Industry Review 2014

Real Estate Activities Industry Review 2014

Real Estate Activities Industry Review - 2014 Full Report Author: John Allcoat, Office for National Statistics 31 October 2014

Contacts This publication For information about the content of this publication, contact: John Allcoat Tel: 01633 456616 Email: IoS.Quality@ons.gsi.gov.uk Copyright © Crown copyright 2014 You may use or re-use this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/doc/open-government-licence/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gsi.gov.uk This document is also available on our website at www.ons.gov.uk

Real Estate Activities Industry Review – 2014 Full Report Contents 1. Introduction . . 5 2. Summary . . 6 3. Industry Overview . . 9 3.1. UK Standard Industrial Classification 2007 (UK SIC (2007)) description...9 3.2. Inter-Departmental Business Register (IDBR) – Industry summary . . 10 3.3. Index of Services (IoS) industry structure . . 11 3.4. Importance of the industry to the UK economy at Blue Book 2013 ... ... 12 3.5. Output index at July 2014 . . 14 4. Previous industry review . . 15 5. Blue Book 2013 Methodology . . 16 5.1. 68.1-2 – Renting and operating of own or leased real estate .

18 5.2. 68.2IMP – Owner occupiers’ housing services . . 19 5.3. 68.3 – Real estate activities on a fee or contract basis ... ... 20 6. Conceptual Quality . . 22 6.1. Industry specific guidance on conceptual quality . . 22 6.2. Blue Book 2013 industry quality rating ... ... 26 7. International Perspective . . 27 8. Issues identified during the industry review . . 30 8.1. Lack of indicator for buying and selling of own real estate (68.1 ... . 30 8.2. Conceptual appropriateness and developments in the data sources for renting and operating of own or leased real estate – letting of own property other than dwellings.

(68.21 . . 32 8.2.1. Conceptual appropriateness of the current price data source . . 33 8.2.2. IPD data assessed against the UK Statistics Authority guidance ‘Quality Assurance and Audit Arrangement for Administrative data ... ... 34 8.2.3. Potential use of monthly VAT data for 68.21 ... ... 37 8.2.4. Future developments for the deflator for commercial property . . 37 8.3. Methodological improvements to the deflator for owner occupiers’ housing services (68.2IMP) and renting and operating of own or leased real estate – actual rentals paid by tenants (68.22 ... ... 39 8.3.1. Blue Book 2013 ...

39 8.3.2. Blue Book 2014 ... . 39 8.3.3. Blue Book 2015 ... . 42 8.4. New current price data source for real estate activities on a fee or contract basis (68.3 ... ... 42 Office for National Statistics | Page 3

Real Estate Activities Industry Review – 2014 Full Report 8.5. Changes to the low level aggregation and deflator weights for real estate for Blue Book 2014 . . 43 8.5.1. Real estate low level aggregation weights ... ... 43 8.5.2. Real estate low level deflator weights ... ... 44 8.6. The reclassification of the UK Standard Industrial Classification and the implications for real estate ... . 46 9. Blue Book 2014 Methodology . . 48 9.1. Importance of the industry to the economy at Blue Book 2014 ... . 48 9.2. Blue Book 2014 data sources ... . 49 9.3. Output index at September 2014 . . 51 9.4.

Blue Book 2014 industry quality rating . . 52 10. User engagement . . 53 11. Recommendations . . 54 12. References . . 55 13. Glossary . . 56 Annex A UK Standard Industrial Classification 2007 (UK SIC (2007)) detailed description for real estate . . 58 Annex B UK Standard Industrial Classification 2007 (UK SIC (2007)) taxonomy and jobs for real estate . . 60 Annex C IDBR Summary information for real estate . . 62 Annex D Historic gross value added weights for real estate . . 64 Annex E Industry Review: Using Administrative data guidance: UK Statistics Authority ‘Quality Assurance and Audit Arrangements for Administrative Data .

66 Annex F List of user engagement visits . . 67 Office for National Statistics | Page 4

Real Estate Activities Industry Review – 2014 Full Report 1. Introduction In the UK, the output approach to measuring GDP (GDP(O)) is based on a comprehensive and wide-ranging suite of short-term indicators that are used to compile the Index of Services, Index of Production, Retail Sales Index and Output in the Construction Industry. As part of the ONS commitment to continuous improvement a programme of industry reviews commenced in December 2012 to review the concepts, methods and data sources underpinning the short-term indicators to ensure that they remain fit for purpose. It also demonstrates the commitment of ONS to quality assure outputs as part of the Code of Practice for Official Statistics.

This programme of reviews mirrors the similar work conducted between 2002 and 2009 during which time the Index of Services achieved National Statistics status in April 2007, due at least in part to the existence and impact of the industry review programme.

The reviews are conducted broadly at divisional level, of the UK Standard Industrial Classification 2007 (UK SIC (2007)) and will cover the whole economy with a provisional completion date of spring 2018. The reviews have been prioritised using a priority matrix designed by ONS which is described in section 4.1 of the GDP Output Improvement Report - 2014 and updated each year. The key determinant of an industry position within the priority matrix is the importance or weight of the industry, as measured by its contribution to gross value added (GVA) within the context of the overall economy.

This is explained more fully in section 3.4.

Each industry is then scored against four qualitative categories. The overall quality of each industry is judged by ONS experts against the latest international guidance and counts for 60% of the score. This Eurostat quality rating is explained more fully in section 6. ONS experts also judge the industry specific quality of an industry accounting for 20% of the overall score which concentrates on issues not identified through the use of international guidance – e.g. the use of annual data or weaker proxy data, or the experimental status of an industry. Finally, the matrix considers the volatility and revisions performance of each industry, with each accounting for 10% of the final score.

These are again more fully explained in section 4.1 of the GDP Output Improvement Report - 2014.

Through using the priority matrix the real estate activities industry review commenced in December 2012. At the time of the GDP Output Improvement Report – 2013 industry 68.1/2 was ranked 2nd and industry 68.3 was ranked 23rd out of 89 industries. In addition to the ranking of the industry the Eurostat quality ratings were ‘B - acceptable’ for 68.1/2 and ‘C – improvement required’ for 68.3. The volatility and revision ratings were both low. The findings of the review are outlined below. Apart from the industry rankings as highlighted above, other notable reasons to undertake the review are listed below:
The size of the real estate sector.

Real estate is currently ranked as the largest 2 digit UK SIC (2007) division based on 2011 GVA weights.

The collection of a Monthly Business Survey (MBS) for UK SIC (2007) 68.3 since July 2010.
The reliance on an administrative data source from a private organisation for part of the industry. (non-dwelling rental activity) Office for National Statistics | Page 5

Real Estate Activities Industry Review – 2014 Full Report
A significant method change as to how the source of imputed and actual rentals is calculated. This has meant an understanding of the method change is required in order to appreciate the implications for GDP(O). For an overview of the real estate activities industry review (2014), please refer to the summary report.

2. Summary Key messages from the real estate industry review are:
Based on 2011 GVA weights real estate (UK SIC (2007) – Division 68) is the largest 2 digit UK SIC (2007) division.

The data source for non-dwelling letting activity is considered conceptually appropriate against international guidance and UK Statistics Authority guidance on the use of administrative data.
Improvements to the data sources in the compilation of price data for actual and imputed rentals. This mirrors the changes implemented in the expenditure approach to gross domestic product (GDP(E)).
There is an emphasis at an international level to improve the information available in terms of commercial property prices.

The need to measure industry UK SIC (2007) 68.1 – buying and selling of own real estate in its own right.
Improvement in the Eurostat ratings across the all individual industry components of real estate.
The updating of the lower level aggregation and deflator weights on a 2010=100 basis.

Below are the recommendations from the real estate industry review: Recommendations which have been implemented as at Blue Book 2014:
The use of the Investment Property Databank (IPD) UK Monthly Index as the indicator for nondwelling rentals is considered conceptually appropriate.

To inform users about the methodological improvements in the production of rentals price data from the perspective of the output approach to measuring gross domestic product implemented at Blue Book 2013 and Blue Book 2014.
Implement the change of indicator for UK SIC (2007) 68.3 – real estate agencies for Blue Book 2014. This has changed from a workforce jobs (productivity adjusted) series to a monthly turnover series as collected by the MBS. This has led to an improvement in quality and increased frequency of data.

Office for National Statistics | Page 6

Real Estate Activities Industry Review – 2014 Full Report Recommendations which need to be completed in the future:
To be completed by Blue Book 2016 - An indicator will be implemented to appropriately measure UK SIC (2007) 68.1 – buying and selling of own real estate.

This will be included alongside the industry review of UK SIC (2007) 41.1 – development of building projects.
To be completed by the next industry review into real estate - To continue to explore the possible use of administrative data and its appropriateness as to the indicator for non-dwelling rentals. This will be included as part of the GDP(O) Improvement project.
To be completed by the next industry review into real estate - To continue to monitor the ongoing development work at UK and international level in the area of commercial property prices. This recommendation is part of the Services Producer Price Index (SPPI) improvement programme.

To be completed by Blue Book 2015 - To inform users about the methodological improvements in the production of rentals price data from the perspective of the output approach to measuring gross domestic product planned to be implemented at Blue Book 2015. Table 1 - Comparison of Blue Book 2013 and Blue Book 2014 GDP(O) data sources for division 68 Blue Book 2013 Blue Book 2014 Industry Group Industry Description Current Price Volume measure Deflator Industry Group Industry Description Current Price Volume measure Deflator 68.1-2 Renting and operating of own or leased real estate – Letting other than dwellings ‘Net Income’ index Investment Property Databank Derived** ‘Rental Value’ index Investment Property Databank 68.1-2 Renting and operating of own or leased real estate – Letting other than dwellings ‘Net Income’ index Investment Property Databank Derived** ‘Rental Value’ index Investment Property Databank 68.1-2 Renting and operating of own or leased real estate – Actual rents paid by tenants Current Price - Actual rentals paid by tenants Chained Volume measure - Actual rentals paid by tenants Implied Deflator - Actual rentals paid by tenants 68.1-2 Renting and operating of own or leased real estate – Actual rents paid by tenants Current Price - Actual rentals paid by tenants Chained Volume measure - Actual rentals paid by tenants Implied Deflator - Actual rentals paid by tenants 68.2IMP Owner occupiers’ housing services Current Price - Imputed rentals paid by tenants Chained Volume measure - Imputed rentals paid by tenants Implied Deflator - Imputed rentals paid by tenants 68.2IMP Owner occupiers’ housing services Current Price - Imputed rentals paid by tenants Chained Volume measure - Imputed rentals paid by tenants Implied Deflator - Imputed rentals paid by tenants 68.3 Real estate activities on a fee or contract basis Derived** Workforce Jobs (Productivity adjusted) Combined deflator 68.3 Real estate activities on a fee or contract basis Monthly Business Survey Derived** Combined deflator Office for National Statistics | Page 7

Real Estate Activities Industry Review – 2014 Full Report Red text denotes a change in the data source as at Blue Book 2014 from Blue Book 2013. Blue text denotes a significant change in the methodology of the indicator as at Blue Book 2014 from Blue Book 2013. ** A ‘derived’ measure can be calculated using the ratio or product of two indices i.e.:
Dividing a current price index by a price index (to create a volume index)
Dividing a current price index by a volume index (to create an implied deflator)
Multiplying a volume index by a price index (to create a derived current price measure) The improvements made from the real estate activities industry review (2014) for Blue Book 2014 are as follows:
Introduction of a new current price series for real estate activities on a fee or contract basis: The change in the current price indicator for 68.3 to Monthly Business Survey data from a workforce jobs (productivity adjusted) series.

This has improved both the periodicity by moving from a quarterly to a monthly indicator along with the quality rating from a ‘C – improvement needed’ method to a ‘B - acceptable’ in comparison against the international guidance.

Also the experimental status of the industry will be reviewed. ‘Section 5 – Progress on experimental industries’ of the GDP Output Improvement Report – 2014 has further information as to this area.
Improvement to the data source for 68.1-2 (actual rentals) and 68.2IMP (imputed rentals): Whilst the underlying series used has not changed for 68.1-2 - renting and operating of own or leased real estate – actual rental paid by tenants and 68.2IMP – owner occupiers’ housing services there have been quality improvements to the source data used to compile the data within GDP(O). This has improved the quality rating for 68.1-2 and 68.2IMP from a ‘B - acceptable’ to an ‘A – appropriate’ rating.
Updated low level industry weights: Improvements to reflect the aggregation weights for 68.1-2 and deflator weights for 68.3 are on a 2010=100 basis.

Office for National Statistics | Page 8

Real Estate Activities Industry Review – 2014 Full Report 3. Industry Overview 3.1. UK Standard Industrial Classification 2007 (UK SIC (2007)) description In terms of the real estate sector it is useful to define what is included in the industry in order to ascertain the scope of the review. Based on the ‘UK Standard Industrial Classification (2007)’ the following areas are classified to real estate. (Please refer to pages 198 and 199 in the ‘Main Volume’ hyperlink for real estate) Table 2 – UK Standard Industrial Classification 2007 codes for real estate activities UK SIC (2007) Component UK SIC (2007) Description Section L Real estate activities Division 68 Real estate activities Group 681 Buying and selling of own real estate Group 682 Renting and operating of own or leased real estate Subclass 68201 Renting and operating of Housing Association real estate Subclass 68202 Letting and operating of own conference and exhibition centres Subclass 68209 Letting and operating of own or leased real estate (other than Housing Association real estate and conference and exhibition centres) Group 683 Real estate activities on a fee or contract basis Class 6831 Real estate agencies Class 6832 Management of real estate on a fee or contract basis Please see annex A for further detailed breakdown of the UK SIC (2007) for real estate.

In terms of taxonomy (please refer to page 299 in the ‘Index, Alphabetical and Numerical’ hyperlink for real estate) the types of roles and jobs undertaken within each area can be found in annex B attached. This is useful as it provides a more specific idea as to what roles and jobs are undertaken as to various parts of the real estate industry. It is also useful to help users understand where businesses are classified and should be used in conjunction with the UK SIC (2007) industry breakdowns as stated in table 2.

Office for National Statistics | Page 9

Real Estate Activities Industry Review – 2014 Full Report 3.2. Inter-Departmental Business Register (IDBR) – Industry summary The Inter-Departmental Business Register (IDBR) is a comprehensive list of UK businesses that is used by government for statistical purposes. It provides the main sampling frame for business surveys carried out by both the ONS and other government departments. It is also a key data source for analyses of business activity. The main administrative sources for the IDBR are VAT (Value Added Tax) and PAYE (Pay As You Earn) information from HM Revenue & Customs (HMRC) and details of incorporated businesses from Companies House.

The information from these administrative sources is supplemented mainly by the ONS Business Register and Employment Survey (BRES) to form the IDBR. Using information as sourced from the IDBR, real estate industry (UK SIC (2007) Division 68) is made up of a variety of different businesses in terms of size and geographical location. Below is a selection of useful facts and figures with regards to the real estate industry as of March 2013:
There were just under 80,000 (79,885) enterprises allocated to the real estate industry. This was increase of 2,760 (3.6% increase) enterprises from the previous year.
The majority of enterprises within the division were allocated to 68.20 – renting and operating of own or leased real estate.

This class had 48,305 enterprises. (60.5% of the total division)
68.10 – buying and selling of own real estate was the smallest component of the division. This class had 3,395 enterprises. (4.3% of the total division)
The majority of businesses employed fewer than 10 people (74,505 enterprises or 93.3% of the division).

Over 5,000 enterprises in the division had an annual VAT turnover over £1m.
Just over 75% of the sector had been trading for 4 years or longer.
In terms of geographical location just over 30,000 enterprises were located in London and South East which equated to 38.1% of the total division. Please note all IDBR analysis has been taken from the publication ‘UK Business: Activity, Size and Location - 2013’ For further summary information on real estate as sourced from the IDBR please see annex C. This information provides a snapshot of the IDBR on a class basis (4 digit SIC) for real estate as of 12 March 2013.

Office for National Statistics | Page 10

Real Estate Activities Industry Review – 2014 Full Report 3.3. Index of Services (IoS) industry structure Whilst it is useful to identify the types of breakdown by UK SIC (2007) and the type of activities and roles undertaken by the industry, the reporting structure of the division is on a different aggregation basis for Index of Services (IoS) purposes. The IoS structure for real estate is based on the Supply and Use Table (SUT) structure. For real estate this as below: Table 3 – Real Estate Activities industry structure for Index of Services - Blue Book 2013 IoS Industry IoS Description 68.1-2 Real estate services, excluding on a fee or contract basis and imputed rental 68.2IMP Owner-Occupiers’ Housing Services 68.3 Real estate activities on a fee or contract basis As can be seen for 68.3 – real estate activities on a fee or contract basis the SUT and UK SIC (2007) structures are exactly the same.

The difference in aggregation occurs within UK SIC (2007) 68.1 and 68.2. 68.1-2 is combined for SUT purposes, however the element of 68.1-2 referring to 68.2IMP has been removed.

68.2IMP is referred to as owner occupiers’ housing services. This is sometimes referred to as ‘imputed rentals’ for national accounts purposes. This is in effect the amount a homeowner would pay for the equivalent dwelling if they had to pay rent. The European System of Accounts 2010 version (ESA 2010) (see pages 66 and 67 for the definition of owner-occupier dwellings) defines this area as ‘the estimated value of rental that a tenant would pay for the same accommodation, taking into account factors such as location, neighbourhood amenities, etc as well as the size and quality of the dwelling itself.’ 68.2IMP is required in order to carry out international comparison of the household sector and national accounts overall.

This is because the makeup of the housing market could vary across countries at any given point in time. In some countries the composition may be more inclined to people who rent and in others more inclined to people who own their homes i.e. owner-occupiers. Households who rent (whether through a private landlord or via social housing) would be classified to 68.1-2 under the SUT structure, whereas owner-occupiers would be picked up in 68.2IMP. Therefore, without collecting 68.2IMP a significant area of the economy would not be accounted for and it would be harder to make comparisons at international level, as these would then be on an inconsistent basis.

Another reason as to the need to record 68.2IMP is for the production of a comparable time series over time for real estate. Without calculating imputed rental it would be very difficult to have meaningful data in this area of the economy as there have been noticeable policy changes which have direct consequences in terms of the composition of home ownership for the industry. For example in 1980 as part of the Housing Act the UK government brought in the ‘Right to Buy’ scheme, whereby local authorities sold social housing to sitting tenants. This transfer of home ownership from the state to the individual had the effect of increasing owner-occupiers (68.2IMP) and reducing tenants who rented social housing (68.1-2).

For further information as to the home ownership and renting in England and Wales please see Awano 2013.

Within 68.1-2 there is a breakdown of residential and non-residential activity. This is required in order to distinguish between two different areas of real estate services which are found within 68.1- 2. As a result it has been deemed necessary to split out the residential and non-residential as no Office for National Statistics | Page 11

Real Estate Activities Industry Review – 2014 Full Report one single indicator can sufficiently capture both elements. For the purposes of the rest of the report, non-residential activity is referred to as industry code 68.21 and residential activity is referred to as industry code 68.22.

These industry codes do not follow any international reporting standard or classification and are only required for ONS purposes in order to distinguish between the activities in the area of 68.1-2. For further information as to the data sources used for real estate please see section 5. 3.4. Importance of the industry to the UK economy at Blue Book 2013 The importance of each industry within the context of the gross domestic product (GDP) produced by the overall economy can be expressed by a weight, in parts per thousand. For the output approach to measuring GDP this represents its proportion of the sum of gross value added (GVA) produced by the economy in a given year.

GVA is derived from outputs less inputs, or output less intermediate consumption. This is explained in further detail in the ‘UK National Accounts – a short guide’.

The weights used by GDP(O) are derived from Supply and Use tables calculated as part of supply and use balancing for each year from 1997 and revisions tend to be higher in later periods. The weights are specifically the GVA for the industry divided by the total GVA for the economy and then multiplied by 1000. To calculate GVA weights specific for the services industries, or Index of Services GVA weights, rather than dividing by the whole economy, the denominator is the GVA of the services industries. For Blue Book 2014, balancing was applied to 2012 for the first time but GDP(O) has only used weights for the years up to and including 2011.

This is due to the convention that weights must undergo two years of balancing to minimise the impact of any revisions. The weights for 2011 are also used in later periods. Updated weights will decrease the importance of industries where GVA has fallen and increase the importance of industries where GVA has risen. This will necessarily create the potential for revision to the overall GDP(O) index as, although the growth rates of constituent industries remain unchanged, their significance will vary each year. The last year for which weights are calculated is also the reference year for the index.

Therefore, for UK National Accounts - Blue Book 2013, the last set of industry weights was for 2010 and therefore the index was produced on a 2010=100 basis. For the most recent UK National Accounts - Blue Book 2014, the latest GVA weights are for 2011 with the index produced on a 2011=100 basis. Office for National Statistics | Page 12

Real Estate Activities Industry Review – 2014 Full Report In terms of GVA weights in 2010, real estate (UK SIC (2007) Division 68) represents: Table 4: Blue Book 2013 summary of 2010 weights for division 68 2010 GVA Weights GDP(O) Weights IoS Weights (ppt)** Industry Code Industry Description Section (ppt)** Industry (ppt)** Low level industry* (ppt)** L Real Estate Activities 96.8686 124.5122 68 Real Estate Activities 96.8686 124.5122 68.1-2 Buying and selling of own real estate; renting and operating of own or leased real estate, excluding imputed rental 24.9781 32.1062 68.21 Letting of own property other than dwellings 13.1408 16.8908 68.22 Actual rentals paid by tenants 11.8373 15.2154 68.2IMP Imputed rental 67.5001 86.7672 68.3 Real estate activities on a fee or contract basis 4.3903 5.6432 * On a 2005 price basis; **(ppt) = Parts per thousand All weights listed above are expressed as parts per thousand (ppt) and indicate the relative contribution to the UK economy, with the exception of IoS weights, which indicate the relative contribution to the UK services industries.

What is worthwhile highlighting is the weights in table 4 are as at Blue Book 2013 for reference year 2010, these weights are revised year on year as further, more detailed data become available. This means that for Blue Book 2013, the real estate industry contributed 9.7% to the total UK economy and 12.5% to the services industries in 2010. For GVA weights for Blue Book 2014 (reference year 2011) please see section 9.1. For further information as to the historic GVA weights for real estate please see annex D. The low level industry weights are used to aggregate low level indices to the required SUT level (i.e.

68.1-2). These low level weights, also known as low level industry aggregation weights, are updated less frequently than GVA weights, and as at Blue Book 2013, were last updated to a 2005 price basis. For Blue Book 2014, these low level industry weights have been updated to a 2010 basis.

For further information on the derivation of IoS weights, aggregation weights and deflator weights, see the Index of Services methods page on the ONS website. For an overview of GVA weights used in GDP(O), see the output approach to measuring gross domestic product – methods and sources page on the ONS website. Office for National Statistics | Page 13

Real Estate Activities Industry Review – 2014 Full Report 3.5. Output index at July 2014 Below is a graphical representation of the output index for real estate. The graph looks at the time period 2007Q1 to 20104Q2, however data can be obtained back until 1990 on a quarterly or annual basis.

All data can be found in the GDP publications (preliminary estimate, second estimate and the Quarterly National Accounts) at the spreadsheet entitled: 'GDP(O) Low Level Aggregates' (Please note the hyperlinks directs you to the separate GDP publication homepages. To access the latest version of the data please select the latest GDP release and access the reference tables link.) The graph illustrates how the index for real estate has been reported over time. Also on the graph it shows the SUT level components of Div.68 as stated in section 3.3. What is noticeable is that in the recent period 68.3 has been the most volatile component, but due to its relative small weighting this is having minimal effect on the divisional index overall.

As can be seen the industry overall follows very closely to the index of SUT 68.2IMP. This would be as expected with around 70% of the industry based on 2010 GVA weights attributed to 68.2IMP.

Figure 1 – Chained volume measure index for real estate activities from GDP Preliminary Q2 2014 (July 2014 release) 60 70 80 90 100 110 120 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 Index Period CVM Index for Division 68 as at July 2014 (2010 = 100) 68 68.1-2 68.2IMP 68.3 Office for National Statistics | Page 14

Real Estate Activities Industry Review – 2014 Full Report 4.

Previous industry review As a commitment to improve the sources and methods used to measure the service sector, real estate was previously reviewed as part of the ONS Index of Services Development Industry Review Programme in the early 2000s. Under the previous industry review programme there were 3 reports on real estate. 1. Real Estate (pt.1) – Published alongside Blue Book 2004 2. Real Estate (pt.2) – Published alongside Blue Book 2005 3. Real Estate Agencies – Published alongside Blue Book 2009 The previous industry review programme initially split the real estate review into two components (pt.1 and pt.2).

Pt.1 investigated UK SIC (2003) 70.2(part) – letting of dwellings and 70.3 – real estate activities on a fee or contract basis. The element of owner occupier housing costs (also known as imputed rentals) was outside of scope for the last review due to acceptance at the time that the methodology met the internationally recognised guidance from Eurostat. This industry review was published alongside Blue Book 2004.

Pt.2 looked at the remainder of UK SIC (2003) 70.2(part) – letting of own property other than dwellings and 70.1 – real estate activities with own property not covered from Pt.1. This industry review was published alongside Blue Book 2005. The third review specifically looked at real estate agencies (UK SIC (2003) 70.3) due to a change in data source methodology. This area had initially been reviewed in real estate (pt.1). The real estate agencies industry review was published alongside Blue Book 2009 and was required because HMRC changed UK SIC classification from 2003 to 2007 earlier than ONS and therefore were producing the data on a different classification basis from that previously available.

The consequence of this was that ONS could not continue to use HMRC monthly turnover data as the indicator for this part of the economy.

These previous reviews provide good background and context information to the methods and sources used to measure the real estate industry for GDP(O). However, since publication of the previous reviews, the methods and sources have been reviewed at periodic points to ensure they meet the requirements of measuring the industry from a national accounts perspective. It cannot therefore be assumed the method stated within these documents was that used at Blue Book 2013. Section 5 explains the methodology as at Blue Book 2013 and builds upon the information included from the previous reviews.

Office for National Statistics | Page 15

Real Estate Activities Industry Review – 2014 Full Report 5. Blue Book 2013 Methodology This section outlines the methodology used to measure short-term output in real estate for the output approach to measuring GDP. The data sources, methods and concepts described in this section relate to those used for Blue Book 2013; prior to the completion of this industry review. Table 5: Summary of Blue Book 2013 GDP(O) methodology for division 68 Industry Code Industry Description Current Price Source Volume Source Deflator Source Low level industry weight (parts per thousand (ppt)) GDP =1000 Component percentage of division 68 (%) 68.1-2 (68.21) Renting and operating of own or leased real estate – Letting of own property other than dwellings 'Net Income' index from the UK Monthly Index (IPD)* Derived** ‘Rental Value’ index from the UK Monthly Index (IPD)* 13.1408 13.6% 68.1-2 (68.22) Renting and operating of own or leased real estate – Actual rents paid by tenants COICOP* code 4.1.1 – Actual Rentals paid by tenants Seasonally adjusted Current Price (HHFCE)* COICOP* code 4.1.1 – Actual Rentals paid by tenants Seasonally adjusted Chained Volume Measure (HHFCE)* COICOP* code 4.1.1 – Actual Rentals paid by tenants Seasonally adjusted Implied Deflator (HHFCE)* 11.8373 12.2% 68.2IMP Owner occupiers’ housing services COICOP* code 4.2.1 – Imputed Rentals for owner occupiers’ Seasonally adjusted Current Price (HHFCE)* COICOP* code 4.2.1 – Imputed Rentals for owner occupiers’ Seasonally adjusted Chained Volume Measure (HHFCE)* COICOP* code 4.2.1 – Imputed Rentals for owner occupiers’ Seasonally adjusted Implied Deflator (HHFCE)* 67.5001 69.7% Office for National Statistics | Page 16

Real Estate Activities Industry Review – 2014 Full Report 68.3 Real estate activities on a fee or contract basis Derived** Quarterly Workforce jobs (productivity adjusted) (WFJ)* Combined deflator of: 68.31: Estate Agent Fees (RPI)* Real Estate Agencies (68.30) (SPPI)* 68.32: Property Rentals (68.20) (SPPI)* Canteens and Catering (56.20) (SPPI)* Security Services (80.11) (SPPI)* Industrial Cleaning (81.22) (SPPI)* 4.3903 4.5% N.B. As it is the methodology as at Blue Book 2013 2010 GVA weights are shown as the basis for the calculations in the weights columns.

Key: IPD – Investment Property Databank SPPI – Services Producer Price Index (SPPI number code is within the brackets) COICOP – Classification of Individual Consumption According to Purpose HHFCE – Household Final Consumption Expenditure WFJ – Workforce Jobs RPI – Retail Price Index **A ‘derived’ measure can be calculated using the ratio or product of two indices i.e.:
Dividing a current price index by a price index (to create a volume index)
Dividing a current price index by a volume index (to create an implied deflator)
Multiplying a volume index by a price index (to create a derived current price measure) Office for National Statistics | Page 17

Real Estate Activities Industry Review – 2014 Full Report 5.1. 68.1-2 – Renting and operating of own or leased real estate At Blue Book 2013 68.1-2 was split into two elements in order to measure the area within GDP(O). These were: i. Renting and operating of own or leased real estateletting of own property other than dwellings (68.21) ii. Renting and operating of own or leased real estate – actual rents paid by tenants (68.22) The first part – ‘letting of own property other than dwellings’ (68.21) was captured in order to express the element relating to non-dwelling activity of renting and operating of own or leased real estate.

The current price indicator was captured through the use of a ‘net income index’ from the Investment Property Databank (IPD). This was collected as part of the IPD UK Monthly Index. (Pg.76 of the guide refers to UK Monthly Index) The Monthly Index was based on property owned by property unit trusts, pooled pension schemes and unit-linked insurance funds. It was therefore the case that these were properties which were held for investment purposes and included commercial property stock which investors would expect a return on. It is worthwhile illustrating that not all investment properties were being measured here but a sample of investment properties.

The UK Monthly Index had a sample of approximately 3,400 properties, and around 15% of the total UK market measured by IPD. The index is compiled from valuation and management records for individual buildings in complete portfolios, collected direct from investors by IPD. All valuations used in the Monthly Index were conducted by qualified valuers, independent of the property owners or managers, working to Royal Institute of Chartered Surveyors (RICS) guidelines. The sample of portfolios broke down into approximately 47% retail, 30% office, 17% industrial and 6% other. This therefore illustrated a wide range of commercial property is included in the index.

IPD are considered market leaders in this form of data collection and therefore in order to maintain the quality of data used and keep compliance costs to a minimum it was considered the best source as at Blue Book 2013. In order to calculate the index for GDP(O) the total net income for ‘all property’ in the index was divided by the total count of properties being valued for the month. In effect this provided an arithmetic mean value for a representative property in the index. It also discounted the effect of higher total net income in the index being attributable to more properties independently valued for a month.

This was then indexed and referenced to a 2010=100 basis. The ‘net’ element relates to the fact the income recorded was net of ground rent. The timeliness of the current price indicator i.e. monthly and the ability IPD had in being able to independently value and measure an extensive amount of non-dwelling properties held for investment purposes were other significant factors in its use. It is worthwhile noting if the Monthly Business Survey were to sample this industry it would have required a large number of questionnaires which would be costly to ONS and increase the burden on business.

The deflator for ‘letting of own property other than dwellings’ was the ‘Rental Value’ index from IPD. This was collected as part of the IPD UK Monthly Index. Similar to the current price estimate, IPD undertook the data collection and produced the price deflator which ONS used within GDP(O). The rental value captured the value of the growth in the open market rental value, i.e., the rent the property would attract if it were put on the market for letting (per square foot). This was the ‘all sector’ index and therefore included the retail, industrial, office and ‘other’ sectors weighted together.

Office for National Statistics | Page 18

Real Estate Activities Industry Review – 2014 Full Report The second part – ‘actual rental paid by tenants’ (68.22) was captured in order to represent the element relating to dwelling activity of renting and operating of own or leased real estate. The output indicator was the seasonally adjusted chained volume measure of actual rental paid by tenants. It was published as part of the quarterly Consumer Trends publication. This was Classification of Individual Consumption According to Purpose (COICOP) code 04.1.1 or Central Database Identifier code (CDID) ‘GBFG’.

The COICOP aims to lay down a framework of homogeneous categories of goods and services, which are considered as a function or purpose of expenditure by households with the object of classifying transactions in relation to individual consumption, social transfers and households' real consumption. The series was found as part of the dataset ‘chained volume measure (CVM), seasonally adjusted’ spreadsheet within the worksheet ‘04KS’. Therefore, the indicator was an expenditure measure of GDP, which was used as a proxy for the output measure of GDP. So there was good congruence between the output and expenditure measures of GDP for this area.

GDP(O) also obtained the current price series for COICOP code 04.1.1 and from the current price and CVM it was possible to obtain an implied deflator as this was calculated by dividing the current price series by the chained volume measure. Like the CVM, both the current price and implied deflator were published in Consumer Trends. The current price indicator was published as part of the ‘current price, seasonally adjusted’ spreadsheet within the worksheet ‘04CS’. This is CDID code ‘BMBT’. The implied deflator indicator was published as part of the ‘implied deflator, seasonally adjusted’ spreadsheet within the worksheet ‘04DS’.

This is CDID code ‘AWPV’.

The CVM series was calculated by using private rental housing price data covering both furnished and unfurnished accommodation. This was collected from the ONS Living Cost and Food Survey (LCF). These price data are combined with housing stock data from Department for Communities and Local Government (DCLG) which are then combined to produce the CVM. The public sector rental data were supplied by local authorities and housing associations to DCLG, Scottish Government, Wales Government and Northern Ireland Executive. These bodies provided data on an annual basis.

5.2. 68.2IMP – Owner occupiers’ housing services At Blue Book 2013 68.2 IMP - owner occupiers’ housing services was required to be captured in order to correctly account for households within the economy who own their own housing.

(As outlined in section 3.3) The output indicator was the seasonally adjusted chained volume measure of imputed rentals for owner-occupiers. It was published as part of the quarterly Consumer Trends publication. This is COICOP code 04.2.1 or CDID ‘CCUO’. The series was found as part of the dataset ‘chained volume measure, seasonally adjusted’ spreadsheet within the worksheet ‘04KS’. GDP(O) also obtained the current price series for COICOP code 04.2.1 and from the current price and CVM it was possible to obtain an implied deflator as this was calculated by dividing the current price series by the chained volume measure.

Like the CVM, both the current price and implied deflator are published in Consumer Trends. The current price indicator was published as part of the ‘current price, seasonally adjusted’ spreadsheet within the worksheet ‘04CS’. This is CDID code ‘CCSS’. The implied deflator indicator was published as part of the ‘implied deflator, seasonally adjusted’ spreadsheet within the worksheet ‘04DS’. This is CDID code ‘AWPX’.

Office for National Statistics | Page 19

Real Estate Activities Industry Review – 2014 Full Report As mentioned previously in the report, the principle of calculating a value for imputed rentals was based on the premise of a rental value being the same as that which would have been paid for a similar property if it were rented in the private sector. It is also worthwhile pointing out a value of imputed rental was calculated for both owner occupiers and rent-free dwellings. On a simple level, the method to calculate imputed owner occupier rent was calculated from an average rental per room being multiplied by the total number of rooms in owner occupied dwellings.

The rental per room was calculated using actual rental data and the number of rooms rented from LCF data (as outlined in section 5.1). The estimate for rent-free dwellings was calculated by multiplying the total number of rooms in rent-free dwellings by the average rent per room. The total rooms’ value was calculated using DCLG housing stock data multiplied by the average number of rooms in a household from LCF data.

This method for producing owner occupiers’ housing services is known as the ‘rentals equivalence’ approach (see page 18 in the hyperlink). The underlying concept for a rental equivalence price index is that a dwelling is a capital good and therefore not consumed, but instead provides a flow of services that are consumed each period. Such services encompass shelter and the security of tenure. The value of the flow of services that owner occupiers receive is assumed equal to the rent that the dwelling might attract in the rental market. Therefore, rental equivalence imputes owner occupiers’ housing costs from the rents paid for equivalent rented properties.

In other words, it is ‘measuring the price owner occupiers would need to pay to rent their own home’. As this approach uses the ‘actual rentals’ estimates as its base for the calculation, owner occupiers’ housing costs will therefore be comparable with the estimates of growth in actual rentals. However it is important to highlight changes in volume could occur. Therefore, the output between actual rentals and owner occupiers’ housing costs could differ.

5.3. 68.3 – Real estate activities on a fee or contract basis At Blue Book 2013 68.3 – real estate activities on a fee or contract basis used a quarterly workforce jobs (productivity adjusted) series as a volume indicator. The raw workforce jobs series was published as part of the quarterly labour market release as part of the JOBS03 tables – ‘Employee jobs by industry’ (Please access the reference tables in the latest publication and search for the JOBS03 dataset). For GDP(O) the growth in the workforce jobs series was used as the proxy for the growth rate for the industry. By using a job series it was difficult to capture changes in efficiencies or quality as with a price series.

Therefore, a productivity adjustment was applied to the workforce jobs series. The productivity adjustment was calculated by dividing market sector GDP(O) by market sector jobs and then applying CPIY to reflect general changes in price. The CPIY is the measure of the Consumer Prices Index which excludes indirect taxes. These are taxes which are directly affected by government driven changes and include amongst things; excise duty on petrol, tobacco and alcohol, VAT, Insurance Premium Tax, Vehicle Excise Duty and stamp duty on share transactions.

The workforce jobs series also had some notable exemptions. Firstly, self employment jobs were excluded and it was a series relating solely to Great Britain activity. Therefore, it excluded Northern Ireland output. However both elements were deemed relatively minor in terms of the overall series and did not significantly impact short term growth estimates. For example it was Office for National Statistics | Page 20

Real Estate Activities Industry Review – 2014 Full Report perceived to be uncommon for a self employed estate agent to be employed within the industry and Northern Ireland employment in this area is low.

Based on June 2014 Northern Ireland data 7,770 persons were employed in section L in total. In terms of 68.3 overall for Great Britain, June 2014 had 245,000 persons employed. Even if all of these 7,700 in section L were employed within 68.3, which is highly unlikely, then this would equate to only 3% of the Great Britain total for 68.3. The deflator for 68.3 – real estate activities on a fee or contract basis was a combined deflator to reflect the varied activity undertaken by this industry. Firstly, the deflator was split into the class level (4 digit UK SIC (2007)). Therefore deflation for 68.3 occurred at: i.

68.31 – real estate agencies ii. 68.32 – management of real estate on a fee or contract basis For 68.31 there was a combination of deflators to reflect the fact that both households and businesses consume real estate agency services. Therefore, there was a bespoke RPI for estate agent fees which acted as the price index for household activity i.e. business to consumer (B2C) and a SPPI for real estate agencies which acted as the price index for business activity i.e. business to business (B2B). The combination of a RPI/SPPI deflator is mainly due to the fact that prices charged between the B2B and B2C markets can vary.

For 68.32 there was a combination of deflators. This was to reflect the varied activities that are undertaken in the management of real estate on a fee or contract basis. These companies can provide cleaning services, security services, collecting rental payments and catering services. It was also assumed that B2B activity is the dominant area in terms of activity. To obtain a price index which captures all of these varied activities was extremely difficult, if not impossible, and therefore a combination of various SPPIs was used in order to deflate the series. Therefore, the SPPI’s (SPPI industry code in brackets) which were used included; property rentals (68.20), canteens and catering (56.20), security services (80.11) and industrial cleaning (81.22).

These four SPPI’s were weighted together to provide an overall deflator for 68.32 within GDP(O). For further information as to how these SPPI’s are complied please see the SPPI methods and guidance manual linked below.

Office for National Statistics | Page 21

You can also read