investments in trophy buildings: an analysis of economic and non-economic factors
DESCRIPTION
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. - PowerPoint PPT PresentationTRANSCRIPT
Investments in trophy buildings:An analysis of economic and
non-economic factorsPresentation by
Fabian Spindler and Carsten Lausbergprepared for the 18th Annual Conference
of the European Real Estate Society,June 15-18, 2011 in Eindhoven
OUTLINE
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Introduction
Definitions: - Landmark building = a building which sets itself apart from other
buildings due to its outstanding architecture, location or other characteristics
- Trophy building = a famous building with which the owner can adorn himself
In this paper used synonymously!
Motivation: German open-ended investment funds are keen investors in landmark buildings although the economics of this special asset class are rather unclear. Do they know what they are doing?Objectives:1. Identify key characteristics of landmark buildings2. Investigate whether investments in trophy buildings pay off
© Spindler/Lausberg 2011, p. 2
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Literature overview
Landmark properties are the classic domain of disciplines like architecture, urban planning, and construction engineering; example: Watts et al. (2007) Still an exotic topic in real estate literature; landmark buildings are sometimes mentioned indirectly, e.g., when the relationship between building features (size, height, number of stories…) and economic variables (rent, cap rates, value…) is studied; example: McDonald/Dermisi (2008)Pioneering works with connection to our research objective: - Hough/Kratz (1983), Vandell/Lane (1989), Gat (1998) rental premium for
high architectural quality in Chicago, Boston, and Tel Aviv- Shilton/Zaccaria (1994), price premium for size, height, and other features
in Manhattan- Kurzrock et al. (2009) value/yield premia for large buildings in Germany- Fürst/MacAllister/Murray (2009) rental premium for office buildings
designed by award-winning architects - Dermisi/McDonald (2010) price premium for fame and facade in Chicago
Other directions: Real estate marketing (Temelová 2004) and behavioral economics, e.g., the influence of prestige and other non-economic factors on real estate investment decisions
© Spindler/Lausberg 2011, p. 3
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Characteristics of landmark buildings
LocationLandmark buildings are typically to be found in prime locations,particularly in the central business districts of the largest metropolises
Size- Extraordinary construction height (meter) or space (square meter)- Point of reference- Formation of the cityscape
ArchitectureUnique features, so that the individual property will stand out from thesurrounding 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
© Spindler/Lausberg 2011, p. 6
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Key Characteristics
Criterion Indicator FormLocation Prominent/singular
address OR CBDyes/no
Size Height (m) OR space (sq.m.)
1st percentile in relevant market
Architecture Prominent architect OR singular design
yes/no
Image Well-known brand name
yes/no
Value Construction costs OR purchase price OR rent per sq.m.
1st percentile in relevant market and period
© Spindler/Lausberg 2011, p. 7
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Safety
Figure 1: Preferences of German institutional investors [Funke/Gebken/Johanning (2010), p. 7]
Assumptions - Specific risks: High construction costs, long duration, high leverage
(with huge potential gains), difficulty to diversify (bulk risk)- Market risks: Higher volatility of top rents, lower vacancy risk
Miller et al. (2003): Rental and value losses for famous landmark buildings after 9-11 terrorist attacks
© Spindler/Lausberg 2011, p. 8
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
2005 2006 2007 2008 2009 20100%
20%
40%
60%
80%
100%
SafetyLiquidityReturnnot specified
Liquidity
© Spindler/Lausberg 2011, p. 9
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction Asset LiquidityTypical characteristics are timing costs, market organization, transaction costsand valuation diversity.
As a result, there is a uncertainty of the future liquiditation process regarding time and proceeds from the sale
Market Liquidity- Market breadth: Large differences in pricing due to the high market
value - Market depth: Market of landmark buildings are more illiquid than
other investments (in 2010, for example, only six landmark buildings in New York City changed owners)
Inability to sell quickly
Return
© Spindler/Lausberg 2011, p. 10
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
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
Non-economic factors
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
© Spindler/Lausberg 2011, p. 11
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Empiricial study, part one: Survey
Methodology: Survey among decision-makers- Online questionnaire (anonymous)- 14 closed and open-ended questions- Invitations were sent to 154 portfolio managers; selection criterion:
internationally operating real estate company- All potential interviewers were contacted personally over a business
platform (www.xing.com) or via email including online link for the survey
- Total population unknown not representative- Response rate 55% (n=84)- July/August 2010
Description of the sample- 80% work in real estate investment, 20% in asset management- 55% fund managers, 18% asset managers, 27% other functions- 91% experience with landmark properties, 9% no experience
© Spindler/Lausberg 2011, p. 12
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Empiricial study, part one: Survey
Results- Landmark buildings compared to ordinary office buildings:
No significant advantages with reference to sale opportunities (in periods of economic difficulty), income retun and capital growth returnAdvantages with reference to vacancy riskRisk factors: small number of potential buyers, high price, leaseability and financing
- Investment decision in landmark buildings:Liquidity as a risk factor plays a medium rolePrestige and marketing purposes are important factors
- Prestige-oriented tenants are willing to pay top rents- Most important advantages and disadvantages of investing in landmark
buildings:Advantages: stable market value, prestige, leaseabilityDisadvantages: low return, high operating expenses, high investment volume
© Spindler/Lausberg 2011, p. 13
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Empiricial study, part one: Survey
© Spindler/Lausberg 2011, p. 14
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction - Evaluation of the purchase criteria to an investment decision in landmark buildings (Scale: 1 important to 5 unimportant ):
gut instinct
powerful position of investor within the industry
diversification
strong liquidity position
return
marketing purposes
prestige
0 1 2 3 4 5
3.30
3.00
2.90
2.80
2.40
2.10
2.10
Empiricial study, part two: Data analysis
Methodolgy: Data analysis- Identification of landmark buildings according to our list of key
characteristics from investor reports, annual statements, property fact sheets, and other publicly available documents; in addition: information from expert interviews
- Collection of data from the same sources- Mainly simple comparisons and descriptive statistics
Data:- Property data of 31 landmark buildings from publicly available and
private sources: Total return, capital growth, rental income, vacancy rate, building features
- IPD real estate indices for Austria, France, Germany, Holland, Japan, UK, and USA; NCREIF Property Index for USA
- 2006-2010, annual data
© Spindler/Lausberg 2011, p. 15
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Empiricial study, part two: Data analysis
Average returns of all landmark buildings in the sample:
Other results:Positive results for 231 out of 291 figures (= 79%), whilst 48 are negativeStrong performance in 2006 and 2007Solid performance in periods of economic difficulty Average total return 7.7%No negative returns on averageStable income return
© Spindler/Lausberg 2011, p. 16
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 20066,6% 6,4% 6,3% 6,1% 5,7% 0,7% 0,4% 1,2% 3,3% 3,5% 7,2% 6,8% 6,4% 9,3% 8,7%
Rental Income Capital Growth Total Return
Empiricial study, part two: Data analysis
© Spindler/Lausberg 2011, p. 17
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction Landmark buildings compared to office building indices- 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 growth return and total return show higher differences than
income return
Link tables- Difference between index return and property return- Descriptive statistics for difference between index return and property return - Relationship between the returns for landmark buildings and the indices
Empiricial study, part two: Data analysis
Risks
Total return
© Spindler/Lausberg 2011, p. 18
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
20102009200820072006
-5%
0%
5%
10%
15%
Landmark BuildingsIndices
STD: 1.3%
STD: 8.1%
Empiricial study, part two: Data analysis
Vacancy rate:
© Spindler/Lausberg 2011, p. 19
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
2006 2007 2008 2009 20100.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Landmark BuildingsOffice Buildings
Ø:4.9%
Ø:8.3%
Conclusion
Stable income returnStable market value especially during difficult economic timesTotal return shows a less volatile progression compared to office buildingsLower vacancy ratePrestige plays an outstanding role
Landmark buildings represent a qualitative and alternative real estate investmentThere are many benefits to investing in landmark buildings compared to ordinary buildings
BUT: More data needed for more reliable and preciseconclusions
© Spindler/Lausberg 2011, p. 20
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Campus of Real EstateNürtingen-Geislingen University Parkstr. 473312 Geislingen, Germany
Fabian Spindler Dr. Carsten Lausberg, M.S.Professor of Real Estate Banking
[email protected] [email protected]: +49 17 73 09 14 60 Phone: +49 89 41 92 92 14
Questions or Comments?
Contact information:
© Spindler/Lausberg 2011, p. 22
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Empiricial study, part two: Data analysis
Difference between index return and property return (in basis points)
2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006AustriaWien 1 180 80 140 160 140 -120 120 360 160 -220 60 200 510 310 -90Wien 2 80 120 110 - - -120 70 210 - - -40 190 330 - -FranceGreater Paris 1 40 -190 40 40 -10 -360 580 1220 -700 -840 -340 430 1300 -710 -940Graeter Paris 2 -10 -20 10 - - -380 1700 1350 - - -410 1710 1410 - -Paris -390 10 630 -60 -170 -410 490 1310 -820 -1500 -810 540 1980 -940 -1750GermanyFrankfurt 1 30 20 30 50 60 50 310 40 20 90 80 350 80 70 180Frankfurt 2 0 -20 100 160 -10 190 380 200 330 200 190 370 310 490 220Frankfurt 3 - - - - - 340 - - - - - - - - -Frankfurt 4 -20 -130 -100 - - -1400 -850 390 - - -1420 -950 290 - -Hamburg 1 80 -60 -40 -30 -10 0 100 110 -160 430 80 60 80 -190 440Hamburg 2 - - - - - 200 - - - - - - - - -Hamburg 3 50 20 50 70 70 190 -110 200 200 540 240 -70 260 270 640HollandAmsterdam 200 120 140 -80 -110 60 470 370 -670 10 280 640 540 -780 -120Den Haag 1 -20 -220 - - - 290 700 930 50 720 290 530 - - -Den Haag 2 -50 -110 -70 30 - 320 480 550 650 - 290 420 510 650 -Rotterdam -40 -80 -50 - - 440 890 740 - - 420 860 730 - -JapanOsaka - 50 210 - - - 650 2230 - - - 760 2460 - -Tokio - -140 40 - - - 520 2230 - - - 440 2290 - -UKLondon 1 -210 -180 -110 -70 - -90 1230 430 560 - -350 1080 450 420 -London 2 -80 -100 -20 90 100 -360 820 1280 -690 -1860 -480 760 1390 -680 -1840London 3 -60 -60 170 - - -210 800 3230 - - -320 780 3530 - -London 4 -20 30 30 70 50 -370 1390 260 880 -790 -450 1460 420 870 -830USAHouston 700 680 -440 - - 1040 3590 -50 - - 1720 4390 -450 - -New York 1 360 490 610 360 220 -590 3230 960 -1100 -1830 -250 3840 1610 -830 -1670New York 2 - - - 100 -140 - - 3490 2910 600 - - - 2930 400New York 3 - - - - -200 - - - - 1190 - - - - 930San Francisco 140 180 490 360 200 -580 2260 2890 -2840 -1700 -460 2560 3420 -2560 -1570
Rental Income Capital Growth Total Return
back
© Spindler/Lausberg 2011, p. 23
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Empiricial study, part two: Data analysis
back
Descriptive statistics for difference between index return and property return
Rental Income Capital Gain Total Return2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006
Maximum (bps) 700 680 630 360 220 1040 3590 3490 2910 1190 1720 4390 3530 2930 930 Average (bps) 46 21 90 83 14 -81 862 1039 -76 -331 -80 928 1066 -45 -429Minimum (bps) -390 -220 -440 -80 -200 -1400 -850 -50 -2840 -1860 -1420 -950 -450 -2560 -1840
Abs. frequency of excess return (no.)
10 11 15 11 7 10 21 23 9 8 10 21 21 8 6
Rel. frequency of excess return (%)
50 48 68 73 50 45 91 96 56 53 48 91 95 53 43
© Spindler/Lausberg 2011, p. 24
Characteristics
Economic factors
Non-economic factors
Empirical study
Conclusion
Introduction
Empiricial study, part two: Data analysis
back
Relative relationship between the returns for landmark buildings and the indices
Rental Income Capital Growth Total Return
2010 2009 2008 2007 2006 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006Total Landmark Buildings (bps) 1866 1817 2793 1493 840 3112 20791 24972 5768 3772 3640 22404 23880 6015 2817
Ratio (%) 68 58 77 87 56 38 96 100 45 30 41 96 98 47 24