Exploring office investment decision‐making in different European contexts
| Pages | 289-305 |
| Published date | 01 May 2007 |
| DOI | https://doi.org/10.1108/14635780710746939 |
| Date | 01 May 2007 |
| Author | Claire Roberts,John Henneberry |
| Subject Matter | Property management & built environment |
Exploring office investment
decision-making in different
European contexts
Claire Roberts
Department of Real Estate and Construction, Oxford Brookes University,
Oxford, UK, and
John Henneberry
Department of Town and Regional Planning, University of Sheffield,
Sheffield, UK
Abstract
Purpose – Studies of UK and US property investment markets have historically portrayed the
decision-making process as an exercise in rational analysis. This notion is fundamentally flawed as the
concept of a perfect market has limited applicability to the real world context in which property
investment decisions are taken. Investment decision-making is neither clinical nor methodical but is
undertaken by imperfect players in imperfect markets using imperfect information. The purpose of
this paper is to explore the decision making processes of investors.
Design/methodology/approach – A normative-behavioural framework incorporating heuristics is
used, a technique whose application in property research has previously been limited to valuation. The
empirical vehicle for the research was an exploration of the spatial dimension of office property
investment in different European contexts.
Findings – The findings of in-depth case studies of investment decision-making in France, Germany
and the UK indicate that the decision-making process, as perceived by institutional investors, does not
deviate significantly from normative models. However, investors tend to “collapse down” the
decision-making process, taking shortcuts to achieve (in some cases, predefined) investment outcomes.
These short-cuts potentially leave the decision-making process open to the influence of bias,
judgement and sentiment.
Originality/value – This study represents the first attempt to explore, empirically and in detail, the
property investment decision-making process.
Keywords Real estate, Investments, Decisionmaking, France, Germany, United Kingdom
Paper type Research paper
1. Introduction
The literature on property investment decision-making is sparse and poorly integrated.
It is dominated by rationalist perspectives that treat investment behaviour as if it were
highly structured and formalised (Gallimore et al., 2000). Such perspectives are founded
in assumptions that those responsible for taking investment decisions are rational and
that they will make fully informed decisions based wholly in logic (Dubben and Sayce,
1991). According to this approach, actors rely heavily on the use of rational evaluation
The current issue and full text archive of this journal is available at
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The research on which this paper is based was funded by the Economic and Social Research
Council and Investment Property Databank Ltd, through a CASE studentship. The authors are
grateful to the ESRC and to IPD for their support. The usual disclaimers apply.
Office
investment
decision-making
289
Received October 2006
Accepted January 2007
Journal of Property Investment &
Finance
Vol. 25 No. 3, 2007
pp. 289-305
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780710746939
tools such as modern portfolio theory (MPT) and the capital asset pricing model
(CAPM) to inform their investment decision making.
There is significant evidence from the UK office market that patterns of investment
are not those that would result from the application of rational models of
decision-making (Key et al., 1998; Rowley and Henneberry, 1999). London and the
South East occupy a central position in the institutional property market in the UK,
with one-fifth of all UK property investment (by value) being located in the former.
Theory suggests that investors will acquire assets that optimise performance within
their particular risk/return profile. Research over a long period has demonstrated that
returns on office property investments are higher and risks are lower (lower volatility
of returns and higher liquidity of markets) in peripheral than in core cities and regions
of the UK (Investment Property Databank, 1993, 1996, 2004). Yet several studies have
highlighted the distinct and continuing preference of UK investors for office properties
located in core markets irrespective of their relative performance (Ball, 1998; Key et al.,
1998). For mainstream economists, the behaviour described above is irrational because
it does not serve to maximise investment performance.
The limited amount of investigation into the property investment decision-making
process has typically been concerned with the rules and techniques that
decision-makers should adopt rather than with examining the reality of investors’
behaviour in the market. This paper argues that the current treatment of investment
decision-making is inadequate as it does not present a real-world view of the process of
decision-making. In order to improve our understanding of the pattern of property
investment, a better appreciation of the nature and character of the decision-making
process is required. In this paper, we use geographical diversification decisions as a
vehicle for exploring the current mismatch between theory and evidence with regard to
investment decision-making in the UK.
We develop the discussion in four stages. First, we review the existing literature
relating to investment decision-making. From this, an alternative framework of
decision-making is proposed in which the study can be theoretically grounded. Third,
research issues are discussed and the methodology that was used to ob tain the
empirical evidence for the study is outlined. Next, that evidence is presented and
analysed in detail. Finally it is interpreted to explore its potential implications for the
actors involved, the investment decision-making process and the investment market as
a whole.
2. The investment decision-making process
2.1 Normative models
Theory in this area of property attempts to provide a structure within which those
actors undertaking investment decisions can maximise their wealth. The rationali st
literature conceptualises the investment decision as a multi-level procedure, leading to
the commitment of resources in anticipation of future returns which is undertaken by a
single actor, “the investor”. He/she is required to have expert knowledge of the
structure and nature of the property investment market and the process of investment.
By implication, “the investor” is, therefore, the investment manager.
A composite model of the property investment decision-making process may be
derived from the analysis and combination of the various normative models proposed
in the literature (Eilon, 1969; Farragher and Kleinman, 1996; Feeney et al., 2000;
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