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Investments in trophy buildings: An analysis of economic and non-economic factors. OUTLINE. Introduction. Presentation by Fabian Spindler and Carsten Lausberg prepared for the 18th Annual Conference of the European Real Estate Society, June 15-18, 2011 in Eindhoven. Characteristics.

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investments in trophy buildings an analysis of economic and non economic factors
Investments in trophy buildings:An analysis of economic and non-economic factors

OUTLINE

Introduction

Presentation by

Fabian Spindler and Carsten Lausberg

prepared for the 18th Annual Conference of the European Real Estate Society,June 15-18, 2011 in Eindhoven

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

introduction
Introduction

Introduction

  • Definitions:
    • Landmark building = a buildingwhichsetsitself apart fromother buildings due toitsoutstandingarchitecture, locationorother characteristics
    • Trophybuilding = a famousbuildingwithwhichtheownercanadornhimself

In thispaperusedsynonymously!

  • Motivation: German open-endedinvestmentfundsarekeeninvestors in landmark buildings althoughtheeconomicsofthisspecialassetclassareratherunclear. Do theyknowwhattheyaredoing?
  • Objectives:
    • Identifykey characteristics oflandmark buildings
    • Investigatewhetherinvestments in trophy buildings pay off

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

literature overview
Literatureoverview

Introduction

  • Landmark propertiesarethe classic domainofdisciplineslikearchitecture, urban planning, andconstructionengineering; example: Wattset al. (2007)
  • Still an exotictopic in real estateliterature; landmark buildings aresometimesmentionedindirectly, e.g., whenthe relationship betweenbuildingfeatures (size, height, numberof stories…) andeconomic variables (rent, caprates, value…) isstudied; example: McDonald/Dermisi(2008)
  • Pioneeringworkswithconnectiontoourresearchobjective:
    • Hough/Kratz (1983), Vandell/Lane (1989), Gat (1998)  rentalpremiumforhigharchitecturalquality in Chicago, Boston, and Tel Aviv
    • Shilton/Zaccaria (1994),  price premium for size, height, and other features in Manhattan
    • Kurzrock et al. (2009)  value/yieldpremiafor large buildings in Germany
    • Fürst/MacAllister/Murray (2009)  rental premium for office buildings designed by award-winning architects
    • Dermisi/McDonald (2010)  pricepremiumforfameandfacade in Chicago
  • Other directions: Real estatemarketing(Temelová 2004) andbehavioraleconomics, e.g., theinfluenceofprestigeandother non-economicfactors on real estateinvestmentdecisions

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

characteristics of landmark buildings
Characteristics oflandmark buildings

Introduction

  • Location

Landmark buildings are typically to be found in prime locations,

particularly in the central business districts of the largest metropolises

  • Size
    • Extraordinaryconstructionheight (meter) orspace (squaremeter)
    • Point ofreference
    • Formation ofthe cityscape
  • Architecture

Unique features, so that the individual property will stand out from the

surrounding buildings

  • Image
    • Positioning of the landmark building as an independent brand
    • Distinguished from the bulk of other buildings
  • Value
    • High construction costs, especially with increasing number of stories and distinctive/unique architecture; as a result: high purchase price
    • Top rents, especially on the upper stories

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

key characteristics
Key Characteristics

Introduction

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

safety
Safety

Introduction

Figure 1: Preferencesof German institutionalinvestors[Funke/Gebken/Johanning(2010), p. 7]

  • Assumptions
    • Specificrisks: High constructioncosts, longduration, highleverage (withhuge potential gains), difficultytodiversify (bulkrisk)
    • Market risks: Higher volatilityof top rents, lowervacancyrisk
  • Miller et al. (2003): Rental and value lossesforfamouslandmark buildings after 9-11 terroristattacks

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

liquidity
Liquidity

Introduction

  • Asset Liquidity

Typical characteristics are timing costs, market organization, transaction costs

andvaluation diversity.

As a result, there is a uncertainty of the futureliquiditation process regarding time and proceeds from the sale

  • Market Liquidity
    • Market breadth: Large differences in pricing due tothehighmarket value
    • Market depth: Market oflandmarkbuildingsaremore illiquid thanother investments (in 2010, for example, only six landmarkbuildings in New York City changed owners)

Inability tosellquickly

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

return
Return

Introduction

Assumptions about the most important factors:

  • Acquisition
    • High purchase price due to the high construction costs
    • Investors need to be clear that they will pay a premium for extraordinary construction height and prestige
  • Rental income
    • Pressure on higher rental income compared with ordinary office buildings because of considerable acquisition and maintanance costs
    • Top rents are generally achieved only on the upper stories
  • Sale proceeds

Pressure on estimated sale proceeds due to the high acquisition costs

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

non economic factors
Non-economicfactors

Introduction

  • Prestige = respect or esteem from other people (Maslow 1943)
    • Subjective component (evaluation according to the values of the society) and objective component (importance that a person or a firm derives from this for herself or others)
    • Not necessarily contrary to economic objectives, e.g., prestige important to canvass new customers
  • Power = the ability of an actor to realize his or her will in a social action, even against the will of other actors(Weber 1946)
  • Assumptions:
    • Investment funds and their managers can increase prestige and power by buying trophy buildings
    • Decision-makers with strong prestige or power motives tend to prefer trophy buildings due to the possible increase in prestige or power respectively
    • Non-economic factors occasionally dominate economic factors

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

empiricial study part one survey
Empiricialstudy, partone: Survey

Introduction

  • Methodology: Survey amongdecision-makers
    • Online questionnaire(anonymous)
    • 14 closedand open-endedquestions
    • Invitationsweresentto 154 portfoliomanagers; selection criterion: internationally operating real estatecompany
    • All potential interviewerswerecontactedpersonallyover a businessplatform (www.xing.com) orvia email including online link forthesurvey
    • Total populationunknown not representative
    • Response rate 55% (n=84)
    • July/August 2010
  • Description ofthe sample
    • 80% work in real estateinvestment, 20% in assetmanagement
    • 55% fundmanagers, 18% assetmanagers, 27% otherfunctions
    • 91% experiencewithlandmarkproperties, 9% noexperience

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

empiricial study part one survey1
Empiricialstudy, partone: Survey

Introduction

  • Results
    • Landmark buildingscomparedtoordinaryoffice buildings:
      • Nosignificantadvantageswithreferencetosaleopportunities (in periodsofeconomicdifficulty), incomeretunandcapitalgrowthreturn
      • Advantages with referencetovacancyrisk
      • Risk factors: small number of potential buyers, highprice, leaseabilityand financing
    • Investment decision in landmark buildings:
      • Liquidityas a risk factor plays a medium role
      • Prestige andmarketingpurposesareimportantfactors
    • Prestige-orientedtenantsarewillingtopay top rents
    • Most importantadvantagesanddisadvantagesofinvesting in landmarkbuildings:
      • Advantages: stable market value, prestige, leaseability
      • Disadvantages: low return, highoperatingexpenses, high investment volume

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

empiricial study part one survey2
Empiricialstudy, partone: Survey

Introduction

  • Evaluation ofthepurchasecriteriato an investmentdecision in landmark buildings (Scale: 1 importantto 5 unimportant ):

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

empiricial study part two data analysis
Empiricialstudy, parttwo: Data analysis

Introduction

  • Methodolgy: Data analysis
    • Identificationoflandmark buildings accordingtoourlistofkey characteristics frominvestorreports, annualstatements, propertyfactsheets, andotherpubliclyavailabledocuments; in addition: informationfrom expert interviews
    • Collectionofdatafromthe same sources
    • Mainly simple comparisonsanddescriptivestatistics
  • Data:
    • Property dataof 31 landmarkbuildingsfrompubliclyavailableand private sources: Total return, capitalgrowth, rentalincome, vacancy rate, buildingfeatures
    • IPD real estateindicesforAustria, France, Germany, Holland, Japan, UK, and USA; NCREIF Property Index for USA
    • 2006-2010, annualdata

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

empiricial study part two data analysis1
Empiricialstudy, parttwo: Data analysis

Introduction

  • Average returns of all landmark buildings in the sample:
  • Other results:
      • Positive results for 231 out of 291 figures (= 79%), whilst 48 are negative
      • Strong performance in 2006 and 2007
      • Solid performance in periods of economic difficulty
      • Average total return 7.7%
      • No negative returns on average
      • Stable income return

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

empiricial study part two data analysis2
Empiricialstudy, parttwo: Data analysis

Introduction

  • Landmark buildingscomparedtoofficebuildingindices
    • Returns were greater than the respective benchmarks in most years, especially in 2008 and 2009
    • In absolute figures: 191 out of 289 positive (= 66%)
    • Capital growthreturnand total returnshow higherdifferencesthanincomereturn
  • Link tables
    • Differencebetween index return and property return
    • Descriptive statistics for differencebetween index return and property return
    • Relationship between the returns for landmark buildings and the indices

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

empiricial study part two data analysis3
Empiricialstudy, parttwo: Data analysis

Introduction

  • Risks

Total return

Characteristics

Economic factors

STD: 8.1%

Non-economic factors

STD: 1.3%

Empirical study

Conclusion

empiricial study part two data analysis4
Empiricialstudy, parttwo: Data analysis

Introduction

Vacancy rate:

Characteristics

Economic factors

Ø:8.3%

Non-economic factors

Ø:4.9%

Empirical study

Conclusion

conclusion
Conclusion

Introduction

  • Stableincomereturn
  • Stablemarket value especiallyduringdifficulteconomictimes
    • Total return shows a less volatile progression compared to office buildings
    • Lower vacancy rate
    • Prestige plays an outstandingrole

Landmark buildingsrepresent a qualitative and alternative real estateinvestment

Therearemanybenefitstoinvesting in landmarkbuildingscomparedtoordinarybuildings BUT: More data needed for more reliable and precise conclusions

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

slide19

Questionsor Comments?

Contact information:

Campus of Real Estate

Nürtingen-Geislingen University

Parkstr. 4

73312 Geislingen, Germany

Fabian Spindler Dr. Carsten Lausberg, M.S.

Professor of Real Estate Banking

privat.spindler@googlemail.comcarsten.lausberg@hfwu.de

Phone: +49 17 73 09 14 60Phone: +49 89 41 92 92 14

slide20

Empiricialstudy, parttwo: Data analysis

Introduction

  • Differencebetween index return and property return (in basis points)

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

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slide21

Empiricialstudy, parttwo: Data analysis

Introduction

  • Descriptive statistics for differencebetween index return and property return

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

back

slide22

Empiricialstudy, parttwo: Data analysis

Introduction

  • Relative relationship between the returns for landmark buildings and the indices

Characteristics

Economic factors

Non-economic factors

Empirical study

Conclusion

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