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

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


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


Characteristics

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


Characteristics

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


Characteristics

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


Characteristics

Economic factors


Empirical study

Conclusion

Introduction

2005 2006 2007 2008 2009 20100%

20%

40%

60%

80%

100%

SafetyLiquidityReturnnot specified

Liquidity


Characteristics

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


Characteristics

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


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


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


Characteristics

Economic factors


Empirical study

Conclusion

Introduction


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


Characteristics

Economic factors


Empirical study

Conclusion

Introduction



Characteristics

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


Characteristics

Economic factors


Empirical study

Conclusion

Introduction


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


Characteristics

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



Characteristics

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


Risks

Total return


Characteristics

Economic factors


Empirical study

Conclusion

Introduction

20102009200820072006

-5%

0%

5%

10%

15%

Landmark BuildingsIndices

STD: 1.3%

STD: 8.1%


Vacancy rate:


Characteristics

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


Characteristics

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:


Characteristics

Economic factors


Empirical study

Conclusion

Introduction


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


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Characteristics

Economic factors


Empirical study

Conclusion

Introduction


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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


Characteristics

Economic factors


Empirical study

Conclusion

Introduction


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Relative relationship between the returns for landmark buildings and the indices


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

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

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