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
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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

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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


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     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




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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)




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•   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 non-
    dwelling 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.




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   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     Industry           Current       Volume          Deflator      Industry    Industry            Current         Volume            Deflator
Group       Description          Price        measure                       Group      Description           Price          measure

            Renting and                                                                Renting and
            operating of      ‘Net Income’                     ‘Rental                 operating of      ‘Net Income’                         ‘Rental
                own or           index                       Value’ index                  own or           index                           Value’ index
             leased real                                                                leased real
                                              Derived**                                                                     Derived**
               estate –        Investment                    Investment                   estate –        Investment                         Investment
 68.1-2                                                                      68.1-2
            Letting other        Property                     Property                 Letting other        Property                           Property
                 than           Databank                      Databank                      than           Databank                           Databank
              dwellings                                                                  dwellings


             Renting and                                                               Renting and
                                Current                                                                     Current         Chained
             operating of                      Chained                                 operating of
                                 Price -                       Implied                                       Price -         Volume           Implied
                own or                         Volume                                     own or
                                 Actual                       Deflator -                                     Actual         measure -        Deflator -
             leased real                      measure -                                leased real
                              rentals paid                      Actual                                    rentals paid        Actual           Actual
               estate –                         Actual                                   estate –
                               by tenants                    rentals paid                                  by tenants        rentals        rentals paid
 68.1-2      Actual rents                    rentals paid                    68.1-2    Actual rents
                                                              by tenants                                                     paid by         by tenants
               paid by                        by tenants                                 paid by
                                                                                                                             tenants
               tenants                                                                   tenants


                                               Chained                                                                      Chained
                                 Current                        Implied                                      Current                           Implied
                                               Volume                                                                        Volume
               Owner             Price -                      Deflator -                  Owner              Price -                         Deflator -
                                              measure -                                                                     measure -
             occupiers’         Imputed                        Imputed                  occupiers’          Imputed                           Imputed
                                               Imputed                                                                       Imputed
              housing         rentals paid                   rentals paid                housing          rentals paid                      rentals paid
68.2IMP                                      rentals paid                   68.2IMP                                           rentals
              services         by tenants                     by tenants                 services          by tenants                        by tenants
                                              by tenants                                                                      paid by
                                                                                                                              tenants


             Real estate                                                               Real estate
                                              Workforce
  68.3       activities on                                   Combined         68.3     activities on       Monthly
                                                 Jobs                                                                                        Combined
               a fee or        Derived**                      deflator                   a fee or          Business         Derived**
                                             (Productivity                                                                                    deflator
               contract                                                                  contract           Survey
                                               adjusted)
                basis                                                                     basis




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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.




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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.




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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.




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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



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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.




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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
                                                                                Low level
       Industry                                            Section    Industry                            Weights
                    Industry Description                                        industry*
         Code                                              (ppt)**    (ppt)**                             (ppt)**
                                                                                (ppt)**
  L                 Real Estate Activities                 96.8686                                        124.5122
  68                Real Estate Activities                             96.8686                             124.5122
                    Buying and selling of own real
                    estate; renting and operating of own
  68.1-2                                                               24.9781                              32.1062
                    or leased real estate, excluding
                    imputed rental
                    Letting of own property other than
            68.21                                                                      13.1408              16.8908
                    dwellings

            68.22   Actual rentals paid by tenants                                     11.8373              15.2154

  68.2IMP           Imputed rental                                     67.5001                              86.7672
                    Real estate activities on a fee or
  68.3                                                                  4.3903                               5.6432
                    contract basis
* 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.




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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)
                             CVM Index for Division 68 as at July 2014
                                               (2010 = 100)

         120



         110



         100                                                                                               68

                                                                                                           68.1-2
 Index
          90                                                                                               68.2IMP

                                                                                                           68.3

          80



          70



          60
               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




                                              Period




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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.




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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


                                                                                                    Low level           Component
                                                                                                    industry            percentage
                                                                                                     weight             of division
                                        Current Price        Volume                                                         68
Industry                                                                       Deflator
             Industry Description         Source             Source                                 (parts per
  Code                                                                         Source
                                                                                                    thousand                 (%)
                                                                                                      (ppt))

                                                                                                   GDP =1000


68.1-2     (68.21) Renting and          'Net Income'      Derived**         ‘Rental Value’
           operating of own or leased   index from the                      index from the
           real estate –                UK Monthly                          UK Monthly
                                                                                                     13.1408                13.6%
                                        Index                               Index
           Letting of own property
           other than dwellings         (IPD)*                              (IPD)*


68.1-2     (68.22) Renting and          COICOP* code      COICOP* code      COICOP* code
           operating of own or leased   4.1.1 – Actual    4.1.1 – Actual    4.1.1 – Actual
           real estate –                Rentals paid by   Rentals paid by   Rentals paid by
                                        tenants           tenants           tenants
           Actual rents paid by
           tenants                      Seasonally        Seasonally        Seasonally               11.8373
                                                                                                                            12.2%
                                        adjusted          adjusted          adjusted
                                        Current Price     Chained           Implied
                                                          Volume            Deflator
                                        (HHFCE)*          Measure
                                                                            (HHFCE)*
                                                          (HHFCE)*


68.2IMP    Owner occupiers’ housing     COICOP* code      COICOP* code      COICOP* code
           services                     4.2.1 – Imputed   4.2.1 – Imputed   4.2.1 – Imputed
                                        Rentals for       Rentals for       Rentals for
                                        owner             owner             owner
                                        occupiers’        occupiers’        occupiers’
                                                                                                     67.5001
                                                                                                                            69.7%
                                        Seasonally        Seasonally        Seasonally
                                        adjusted          adjusted          adjusted
                                        Current Price     Chained           Implied
                                                          Volume            Deflator
                                        (HHFCE)*          Measure
                                                                            (HHFCE)*
                                                          (HHFCE)*



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68.3     Real estate activities on a   Derived**   Quarterly        Combined
         fee or contract basis                     Workforce jobs   deflator of:
                                                   (productivity
                                                   adjusted)        68.31:
                                                                    Estate Agent
                                                   (WFJ)*           Fees (RPI)*
                                                                    Real Estate
                                                                    Agencies
                                                                    (68.30)
                                                                    (SPPI)*

                                                                    68.32:
                                                                    Property
                                                                    Rentals (68.20)
                                                                    (SPPI)*

                                                                    Canteens and
                                                                                                4.3903
                                                                    Catering                                          4.5%
                                                                    (56.20)
                                                                    (SPPI)*


                                                                     Security
                                                                    Services
                                                                    (80.11)
                                                                    (SPPI)*

                                                                    Industrial
                                                                    Cleaning
                                                                    (81.22)
                                                                    (SPPI)*

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)




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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 estate- letting 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.




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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’.



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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



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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.




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6.     Conceptual Quality


In considering the methodology (as at Blue Book 2013) for measuring real estate it is worthwhile to
understand what international guidance suggests is the best practice as to how to measure the
industry.



6.1.   Industry specific guidance on conceptual quality


ONS uses the most appropriate and comprehensive international guidance to judge the conceptual
quality underpinning estimates of short-term growth. In this context the most important guidance is
that contained in the Eurostat ‘Handbook on price and volume measures in national accounts’
(2001) which provides guidelines on the suitability of methods. The handbook is based upon the
Classification of Products by Activity (CPA) 2002 which broadly relates to UK Standard Industrial
Classification 2003 (UK SIC (2003)).

For Blue Book 2014 ONS has used guidance from a newly revised Eurostat version which has
adopted more pragmatic interpretations, particularly for some of the more conceptually challenging
industries. This guidance will be published in 2014 or 2015 and will also be updated by moving to
CPA 2008 which broadly relates to UK SIC (2007). Using this guidance framework the quality of
each industry is re-assessed by ONS experts each year. It is important to note that the assessment
considers the weakest element of each industry where this breaches a 10% significance threshold
and rates the measures as A, B or C quality, with C rated as ‘improvement required’, B rated
industries being deemed ‘acceptable’ and A rated industries achieving the highest ‘appropriate’
rating.

The Organisation for Economic Co-operation and Development (OECD) has also published the
'Compilation manual for an Index of Service Production' (2007) providing international guidelines
on the compilation of output indicators for the services industries for OECD member countries. It
has been written to compliment the Eurostat ‘Handbook on price and volume measures in national
accounts’ with an emphasis on short-term measures of output, as the Eurostat handbook has been
written in the context of annual data, but can also be used in the context of quarterly and monthly
data. As a guide the manual (paragraph 87) concisely brings together an overview as to the
objective of the guidance:

“Appropriately deflated turnover would be classified as an “A method”. Turnover deflated by a less
appropriate deflator (e.g. with wider industry coverage) would be classified as a “B method”.
Generally the Eurostat Handbook classifies volume measures as B methods. However, if there is a
detailed breakdown by type of commodity ensuring reasonable homogeneity, and there is very little
change in quality, a volume indicator could be classified as an A method. 'Input' indicators are
classified as C category indicators by Eurostat, because they do not adequately detect changes in
productivity; employment is an example.”

The price and volume measures in national accounts guidance suggests the following in terms of
real estate. (Please see sections 4.10.1 and 4.10.2 (pages 97 to 100))




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