ERES 2010 MILANO CONFERENCE Sussie Morrish Department of Management University of Canterbury, NZ Deborah Levy Department of Property University of Auckland, NZ Acknowledgement: RICS

Presentation Format Introduction Background to the study Methods Findings Discussion Implications

Introduction This study looks at business decisions relating to property within the context of small to medium size enterprises (SMEs), which has received little attention in the academic literature. Property is one of, if not the most valuable asset in a business operation. This becomes even more important in SME settings as they are often used as leverage to access finance. Findings from the study will go some way towards better understanding of how property contributes to the success or otherwise of SME operations. Flow-on effect to wider economic prosperity. SMEs are regarded as the engine of many economies

Introduction In New Zealand there are currently close to 350,000 small and medium enterprises compared to 1,600 enterprises employing 100 FTEs or more. The most recent Statistics New Zealand report shows that: Approximately 90% of enterprises employ 5 or fewer people and are considered SMEs From 2001 to 2006, SMEs accounted for approximately 60% of all new net jobs in the economy

Background Evidence from an exploratory study shows that portfolio entrepreneurs use property strategically throughout the different stages of their business operations. Knowing how and why they do this will enhance our understanding of the strategic significance of real estate to small to medium size business. While big corporations are conspicuous in their ownership and management of commercial properties, SMEs are less visible. There is very scarce literature at the interface between property and SME research.

Research Problem SMEs are often constrained by the scarcity of resources and property (i.e. bricks and mortar) still remains a valuable currency that could potentially assist SMEs in ensuring the growth, development and in extreme cases the survival of their business. Understanding the dynamics that exist within this context has great practical implications for theory and practice.

Property-related literature Studies into such issues as the optimal allocation of real estate in institutional investment portfolios, highlight the importance of property as collateral for loan purposes to assist in the diversification to assist in the optimal allocation of an institutional portfolio as a hedge against inflation as a production resource as a strategy for enhancing competitiveness

Background to the study A study by Morrish, Levy and Dong (2009) found that SME portfolio entrepreneurs use property strategically in business decision making. These decisions relate to finance, building space and other business related issues. It was evident that portfolio entrepreneurs incorporate both business and personal wealth strategies in their approach to property ownership.

The role of property Findings of previous study Finance and investment purposes Business related purposes Personal reasons Raising capitalReal estate asset to run the business from Assist family member to enter a business Accumulating profitAs a core businessAcquiring the family home (family assets) Diversification and risk reduction Exit strategyKeep property assets for retirement income Taxation reasonsProviding space for other business activities Income productionEntry into business

The role of property Findings of previous study Entry strategyMid strategyExit strategy Wealth creationComplementary to core business Retirement income Collateral for loan purposes Family inheritance

Methods Two-part study consisting of: Survey: 194 New Zealand SME entrepreneurs 6 in-depth semi-structured interviews with entrepreneurs

Summary of survey results Approximately 50% (n=89) of respondents owned property related to their business 65% said property ownership has had an impact on business decision making Of those that owned business-related properties, approximately 90% said property had been a sound strategic business decision

Property and life cycle stage Pre-venture: Long-term investment; As a core component of a business; For income production Operational Life: For business accommodation purposes; Long-term investment; To accumulate profit Post venture: Long-term investment; Retirement income, To accumulate profit; Overall: Long term investment; business accommodation purposes; to accumulate profit; retirement income

Phase two: Interview results Reasons for property purchase and development varied across the different stages of business operations. Suggest that ownership of property is not only impacted by business strategy but also additional external factors, lifestyle and personal considerations together with specific property investment criteria.

Factors affecting property decisions Personal/family issues Business operations Financial considerations

Factors affecting property decisions Personal/family Issues: Retirement Succession Financial Considerations: Initial finance Investment Bank policy Business Operations: Accommodate business Support growth Support survival

Property and Life cycle stages of SMEs operational life exit entry

Results: strategic impact of property ownerships Personal/emotional “Owning your own home is embedded in kiwi culture, it gives a sense of stability and encourages more of a long term view. More for emotional reasons than pure investment criteria” Property is somewhere to live… you my not make the top dollar on it, but you are not going to be disappointed..you’re basically translating those assets to cash to fund your retirement”. Financial “Investing in property is a waste of capital from a business perspective” “I need to own the building because there is no other way I’m going to get money from the bank”. Business “.. You’ve got control over what you can do with it, whether you can expand and how to configure it” “Your patient base comes generally within a five kilometers of where you practice”.

Discussion This study advances theoretical understanding of the interface between SME operations/processes and strategic property management and development, enhancing our understanding of the value property brings to business. Triangulation method has allowed insights into the behaviour of SME entrepreneurs with regards to the role of their property assets

Discussion Combination of findings from the finance literature and the research studies relating to entrepreneurial behaviour Importance in understanding the life cycle effects of property investment Important to understand the influence of personal requirements in business decisions

Implications and further research In addition the results of this study provide practitioners with a deeper insight into the way SMEs view, acquire, manage and dispose of property. Setting up a property fund for SMEs? Banking policy Fiscal policy Property funds Property development