During the global financial crisis, commercial property prices showed a sharper decline and higher volatility compared to residential property prices. This experience, which implied that commercial property prices were more sensitive to economic developments, revealed the importance of tracking such prices as a part of monitoring economic activity. In 2009, the International Monetary Fund (IMF) and the Financial Stability Board (FSB) published a report, in which they identified the construction of a Commercial Property Price Index (CPPI) as a priority area for countries. Afterwards, the CPPI was included in the G20 Data Gaps Initiative to close policy-relevant data gaps. The Central Bank of the Republic of Türkiye (CBRT) started to publish the CPPI on 26 February 2024 to address this data gap for Türkiye. This blog post provides information on the calculation method and results of the CPPI measured for Türkiye, Istanbul, Ankara and Izmir.
Although commercial property is generally defined as real estate acquired to generate income, it has no internationally-accepted common definition. Measuring price changes in this sector is quite difficult as it has a more heterogeneous structure with a relatively low frequency of transaction compared to residential properties. Therefore, there is no international guidance yet that will facilitate measuring and monitoring prices for countries. As a result of these challenges, only 23 of the 63 members of the Bank for International Settlements (BIS) have been able to publish a CPPI. Türkiye has now joined those countries by starting to publish these statistics.
Data sources for CPPI developed for Türkiye are valuation reports prepared by real estate appraisal companies for banks. Valuation reports feature the age, area, location, construction quality and other characteristics of real estate as well as a monetary valuation of properties determined by an appraiser. The commercial property classification includes many types of real estate such as land, retail properties, offices, field, industrial properties, etc., yet the CBRT’s CPPI calculation is based only on retail property [1] and office [2] valuation reports, in line with international examples. Accordingly, the Retail Property Price Index (RPI) and Office Price Index (OPI) have been constructed for Türkiye in the first stage. In the calculation of the RPI and OPI, the “characteristic-prices-based method”, one of the hedonic regression methods, has been used. This method, which is also used in the calculation of the Residential Property Price Index (RPPI), decomposes the quality effect on prices considering the characteristics of the property, and enables calculation of pure price changes. Regressions were run in regions with sufficient number of observations and regional RPIs and OPIs were calculated using the Fisher index formula. Later, these indices were weighted by the regions’ shares of gross domestic product to extrapolate the country-wide value. Finally, the RPIs and OPIs calculated for the whole country were weighted by the total value of each type of property to obtain the CPPI.
For retail properties and offices, 15,000 and 3,000 valuation reports on average were analyzed, respectively, for overall Türkiye on a quarterly basis. The number of observations does not suffice to calculate the index for each single region and at a monthly frequency. Therefore, the indices are constructed at a quarterly frequency, and published for the three major cities along with the entire country. Chart 1 shows the time series for the RPI, OPI and CPPI, calculated starting from the second quarter of 2015, and taking 2017 as the base year. Accordingly, in the fourth quarter of 2023, the RPI, OPI and CPPI were 1019.7, 1009.5 and 1077.6, respectively.
An analysis of annual changes in the indices reveals that the rise in office prices increased at a higher rate after the third quarter of 2021, however, this rise fell slightly below the increase in retail property prices in the last quarter of 2023 (Chart 2). This divergence favoring office prices over the last two years may have been driven by the recovery in the demand for offices as the effects of the pandemic have passed and the cross-price effect of the increase in house prices on office prices due to high convertibility of vacant offices into residential spaces.
A comparison between CPPI and RPPI indicates that both indices have moved similarly over the analysis period, nevertheless, the divergence favoring residential property prices strengthened as of the last quarter of 2021 and reached its highest level in 2022Q3. This divergence mainly stemmed from the rise in housing demand, people’s tendency to work from home after the pandemic, as well as favorable credit conditions. As of early 2023, the relatively high increase in house prices has been slowing down. In the 2023Q4 while annual CPPI increased by 98.2 percent, annual RPPI increased by 75.5 percent (Chart 3).
To sum up, monitoring price developments in the commercial property market is essential both for monitoring developments in the economy and for financial resilience. The CPPI, which is widely used by policymakers and investors, is a valuable source of information for the national economy. This new set of statistics issued on a quarterly basis by the CBRT, fills an important data gap and provides a new indicator for economic and monetary policies.
[1] A physical business space that operates in a particular sector, usually providing products and services to consumers.
[2] A space where administrative and operational activities related to a business are carried out, where organizational activities are conducted to manage a business or service.