Transaction-based Indices

It evaluates the average price of recently sold real estate property in a given period

Author: Osman Ahmed
Osman Ahmed
Osman Ahmed
Investment Banking | Private Equity

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Reviewed By: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Last Updated:January 4, 2023

In one common practice across several countries, the commercial real estate industry uses a particular methodology to analyze a property properly. 

Following Routledge Companion to Real Estate Investment, transaction-based indices (TBI) are used to track the price changes of an evaluated property. 

In countries like the United States, the United Kingdom, and Hong Kong, transaction-based indices can help analyze the value of a property over a given period. 

The scholarly article, Transaction Based London Commercial Property Indices, also discusses these indices regarding other uses for evaluation. These include reading market trends and interpreting the property’s capital valuation.

For example, creating an analysis of the European real estate market can include the surrounding demographics, location, consumer trends, and property value. 

Transaction-based indices are solely focused on the transactions of a property. However, in calculations discussed later, we see that the transaction approach uses a statistical method. 

As mentioned in the previous example, several factors regarding the property and its surroundings are considered in calculating its value. Likewise, computing the transactions of the property are influenced by the indices used in calculations.

A property’s value is affected by current economic factors and changes over time. Therefore, reevaluations must be made considering the change in value.

Going at the steady pace of changing property values, the finalization of the transaction process takes a material amount of time.

Another practical approach utilized in cases of commercial properties is appraisal-based indices. The appraisal approach is a second alternative to the one mentioned above. More frequently seen, the appraisal-based indices analyze properties based on appraisals made on the asset.

A few notable differences between the two indices outlined objectives in terms of property evaluation. 

The differences consist of the appraisal search and the property returns. Differing indices may undergo opposite approaches in calculations, and property resources are accounted for in each calculation.

First, the appraisal-based approach analyzes properties to pull comparisons of property performances. Second, the risks and returns are carefully accounted for.

The following sections will cover concepts of the ever-growing use of transaction-based indices and practices seen throughout the commercial industry.

Categories of transaction-based indices: CPPI & CCRSI Indices

Within transaction-based indices, several categories make up the practices of analyzing a property’s transaction:

  • The Commercial Property Price Index (CPPI
  • The CoStar Commercial Repeat Sales Index (CCRSI

These are relatively similar indices of the transaction approach. In computing a property’s transaction, the average appreciation can be measured in both indices. The average appreciation is the rate at which values change and initial costs are calculated.

Additionally, both indices (CPPI and CCRSI) consist of similar objectives like performance analysis of businesses, risk assessments, and determining investment decisions. 

As a way to track the numerous property transactions, Moody’s Investor Services and other analytics help collect data. 

A few property types commonly seen on CPPI indices are:

  • Offices & commercial properties
  • Industrial Lands
  • Retail outlets and properties
  • Apartments and Flats. 

Measures are taken monthly according to the property’s market value changes. Over time, the value will fluctuate, so dictating values every month allows for fluctuations. 

For examples of capital valuations of CPPI in both the United States and European countries, check out Green Street to gain in-depth knowledge of the properties around the world.

When considering the different measurements of transaction-based indices, it is important to notice the advantages and disadvantages of each. 

A couple of strong points to note are the accurate measures CPPI upholds. First, CPPI accurately gathers and utilizes precise property values compared to the appraisal-based indices. 

Another focal point to include is the geographical limits that CPPI covers. Across the United States, the indices function in several regions to provide the necessary measurements of property transactions.

Conversely, CPPI can include delayed results after the final transaction. As time permits, the property transactions' measurements might take some time. 

Along with waiting periods, CPPI deals with smaller data sets typically due to fewer transactions in certain regions.

NOTE

As mentioned earlier, CCRSI is closely related to CPPI and provides similar services. CCRSI calculates the property changes from market value by dealing with a monthly measure. 

Commonly seen property categories within the CCRSI index include:

  • Office
  • Industrial
  • Retail
  • Multi-family
  • Hospitality

The advantages and disadvantages are identical to CPPI. 

Other Transaction-Based Indices: NPI & NTBI 

The following indices discussed in the article also apply to the transaction approach but in a more calculated sequence. 

1. NCREIF Property Index, NPI granted by The National Council of Real Estate Investment Fiduciaries (NCREIF)

Commonly seen across the United States, the NPI can be calculated on various asset types. For example, retail centers, office spaces, industrial buildings, and apartment complexes are a few asset types in which NPI is utilized.

NPI is measured every quarter and is calculated as the average of

  • Capital appreciation
  • Gross income
  • Gross returns. 

Operating, redeveloped, and newly developed properties also evaluate NPI to determine asset returns. There must be 60% occupancy for developing properties to continue with the transaction process. 

The property types evaluated are office, industrial, retail, apartment, and hotel properties. 

When considering the pros of NPI, consider the type of properties most commonly dealt with. For example, institutionally owned properties provide a substantial amount of data and calculations for returns.  

Contrarily, an illiquidity lag can create outdated data for complete transactions. The lag can be seen from an appraisal-based standpoint. 

2. NCREIF Transaction-Based Index (NTBI

It is seen within the transaction-based indices group. NTBI is measured every quarter and takes the averages for two factors:

  • Gross total return
  • Price return 

The measurement return on assets for properties purchased with debt can measure operating properties. 

Property types like office, industrial, retail, and apartments make up the NTBI. 

When measuring such properties, the NTBI accurately gathers information regarding the volatility of investments and the returns of the property and its comparables. 

However, small transactions with fewer properties are dealt with in certain regions. The market's illiquidity is another factor of consideration in understanding the differences in transaction-based indices. 

How to calculate the transaction-based indices

The calculation for the transaction approach can vary but is quite similar in how the variables are used. In this hedonic regression model, one must notice the effects of product prices and index construction on the calculation. 

Within the United Kingdom, the simplest form of the equation can be calculated by using a factor of several variables. 

The average prices of all properties and the averages of the features of traded samples are included in the overall transaction index. 

Other factors to add are

  • Product price
  • Product characteristics 
  • Price impacts of characterize
  • Random error term. 

Although these factors greatly consider property value, the calculation does not identify all price influencers. In addition, not all factors are sometimes sufficient to obtain a concise data outcome. 

Throughout the published article from the University of Reading, authors Delany S. and Martinez Diaz R. mention the additional variations for calculation, which leads to the newest form of calculation. 

Similar to the calculations for properties in the United States, a knowledgeable researcher and publisher, Jeffery Fisher, revised the form to conclude several additional factors:

To provide a brief background, Jeffery Fisher is a University professor, publisher, and committee member of the Switzerland Institute of Real Estate Finance and Economics

He has published numerous articles on real estate, much of which are noted throughout the article above.

The equation is revised to include as much accurate data for property transactions worldwide as possible. As a result, different countries will use variations in the calculation, but the variables are relatively similar. 

Build your skills and understanding with one of our Valuation Models that go over benchmarking, transaction setups, and more.

Researched and Authored by Caira Sotingco | LinkedIn

Reviewed and Edited by Krupa Jatania LinkedIn

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