European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 Institutional Real Estate Investment: a Rational ‘Regional’ Interpretation? Peter Byrne, Cath Jackson and Stephen Lee

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 Motivation Henneberry and Roberts (2008) argue that "the interplay between the behaviour of property investors and the geography of property investment has received relatively little academic attention“. We agree! So this is an investigation of the outcome of investor decision-making - by exploring observed patterns of investment - and trying to relate them to the assumption of rationality underlying portfolio investment theory - rationality assessed by exploring market and stock fundamentals Thus - is there bias in geographical patterns of real estate investment across the UK? We examine the hypothesis that investment decision-making in the UK direct property market does not conform to the assumption of economic rationality underpinning portfolio theory.

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 Related Work Shilton, L. and Stanley, C. (1996) Spatial Concentration of Institutional Ownership: New Wave Atomistic or Traditional Urban Clustering, Journal of Real Estate Research, 12, 3, Henneberry, J. (1999) Convergence and Difference in Regional Office Development Cycles, Urban Studies, 36, 9, Henneberry, J. and Rowley, S. (2000) Property Market Processes and Development Outcomes in Cities and Regions, RICS Foundation Research Papers, 3, 9, Henneberry, J. and Roberts, C. (2008) Calculated Inequality? Portfolio Benchmarking and Regional Office Property Investment in the UK, Urban Studies, 45, 5&6, Roberts, C. and Henneberry, J. (2007) Exploring office investment decision- making in different European contexts, Journal of Property Investment and Finance, 25, 3,

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 Related Work Jackson, C. (2001) A Model of Spatial Patterns Across Local Retail Property Markets in Great Britain, Urban Studies, 38, 9, Jackson, C. (2002) Classifying Local Retail Property Markets on the Basis of Retail Rental Growth Rates, Urban Studies, 39, 8, Colwell, P. and Jackson, C. (2004) Modelling rental change across key retail investment markets in Britain: Valuation and measurement considerations, Journal of Property Investment and Finance, 22, 5, Byrne, P. and Lee, S. (2009) Spatial Concentration in Institutional Investment in the UK: Some comparisons between the Retail and Office Sectors, Journal of Property Investment & Finance, 27, 1, Byrne, P. and Lee, S. (2010) Spatial Concentration in Industrial Real Estate: Institutional Investment in England and Wales, Journal of Property Investment & Finance, 28, 1, 6-23.

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 Weltanschauung and Cognitive Philosophy! Mainstream economics assumes that all market actors maximise their utility, subject to exogenously determined constraints to maximise is to be rational. Real estate investor behaviour departs from “perfect rationality” as actors use mechanisms such as mental shortcuts (primarily heuristics and biases) to cope with information processing (Wofford et al., 2010) Investor decision-making driven “by the need for liquidity, political and economic stability, over and above optimal risk-adjusted returns” (Lizieri, 2009) “……..real estate asset pricing is not simply about the investment fundamentals…….” (Diaz, 2010)

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 The Behavioural Paradigm ‘Cognitive risk’ – the risk from not knowing enough – and/or being psychologically unable to find out enough (Wofford et al., 2010) Develop tactics and strategies – plans – to (apparently) minimise cognitive risk. Planning allows emphasis to be placed on factors that are identified as ‘important’- e.g. return and risk? But…. “focus on the metrics related to monitoring a plan may lead to cognitive myopia and stubborn adherence to a strategy that is no longer appropriate”.(Wofford et al., 2010) A classic example – Benchmarking – which by its very nature, emphasises tracking or copying others’ approaches and Styles. Herding? Only if behaviour “cannot be explained by reference to the facts other than the behaviour of the peers” (Forbes, 2009)

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 Data: Real Estate IPD ‘Local Markets’+ Data for Standard Retail, Office and Industrial properties in 400+ locations (Local Authorities - towns and cities) in Great Britain in Commercial and Industrial Floorspace and Rateable Value Statistics 2003 Office of the Deputy Prime Minister (ODPM) (Now – The Department for Communities and Local Government )

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 Data: Socio - Economic UK Office of National Statistics (ONS), multivariate classification of local authorities (essentially towns) based on data from the 2001 census. 42 variables from the Key Statistics dataset, in six main dimensions: demography, household composition, housing, socio-economic, employment and industry. Used a combination of Ward’s hierarchical and k-means cluster analysis methods:- principal clustering at a Supergroup level (seven clusters) Groups (13 clusters) – used in this study Sub-groups (24 clusters) ONS ‘Nomis’ Labour Market Profile: Annual Business Inquiry Employee Analysis Population figures come from the ONS Neighbourhood Statistics: Topics database.

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 ONS Cluster NameLocations Pop % No. of LAs Exemplar Regional CentresBuilt-up areas throughout England &Wales9%20Plymouth Centres with IndustryNorth West and West Midlands11%21Bolton Thriving London PeripheryLondon Periphery + Oxford and Cambridge3%9Reading London SuburbsOuter London + Slough and Luton5%12Redbridge London CentreInner London3%8Islington London CosmopolitanInner London, Except Brent3%7Haringey Prospering Smaller TownsThroughout England &Wales24%113Stroud New and Growing TownsSouthern England6%24Dartford Prospering Southern EnglandHome Counties9%44Horsham Coastal and CountrysideCoastal E&W + some inland areas9%52Christchurch Industrial HinterlandsSouth Wales and Northern England9%31Sunderland Manufacturing TownsSouthern Yorkshire + isolated locations9%34Ellesmere Port

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011

Conclusions Considerable variation in institutional property holdings across diverse areas of the UK. Variations are more pronounced than would be expected. There is an apparent disconnect between market fundamentals and observed aggregate institutional investment. Performance indicators appear to suggest that investors largely target funds towards areas showing the poorest levels of (historic) performance!

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 Conclusions The hypothesis that investment decision-making in the direct property market does not conform to the assumption of economic rationality underpinning portfolio theory seems confirmed. An “operational rationality” (Guy et al., 2002) dominates. Decisions are framed by “a process of social construction” (Guy and Henneberry, 2000), linked to an unhealthy devotion to self-referential benchmarking.

European Real Estate Society 18th Annual Conference, Eindhoven, June 2011 Institutional Real Estate Investment: a Rational ‘Regional’ Interpretation? Peter Byrne, Cath Jackson and Stephen Lee