Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 12: Implicit Forward Rents as Predictors of Future Rents

Peter Englund , Åke Gunnelin (), Martin Hoesli () and Bo Söderberg ()
Additional contact information
Peter Englund: Swedish Institute for Financial Research, Postal: Saltmätargatan 19A, SE-113 59 Stockholm, Sweden
Åke Gunnelin: Swedish Institute for Financial Research, Postal: Saltmätargatan 19A, SE-113 59 Stockholm, Sweden
Martin Hoesli: University of Geneva (HEC and FAME)
Bo Söderberg: Royal Institute of Technology

Abstract: This paper investigates the relation between the term structure of rents and future spot rents. A rich database of office rental agreements for various maturities is used to estimate the term structure of rents, and from this structure implicit forward rents are extracted. The data pertain to commercial properties in the three largest Swedish cities for the period 1998-2002. A positive relation between forward and spot rents is found in some regions, but forward rents underestimate future rent levels. Another contribution of the paper lies in the area of rental index construction. We provide evidence that rental indices should not only be quality-constant (i.e. indices should not only control for the characteristics of rental units), but should also be maturity-constant.

Keywords: Commercial rents; Term structure

JEL-codes: R31

35 pages, November 15, 2002

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