Globalization, integration and commercial property. Evidence from the UK
| Pages | 8-26 |
| Published date | 01 March 1999 |
| Date | 01 March 1999 |
| DOI | https://doi.org/10.1108/14635789910252774 |
| Author | Patrick McAllister |
| Subject Matter | Property management & built environment |
JPIF
17,1
8
ACADEMIC PAPERS
Globalization, integration and
commercial property
Evidence from the UK
Patrick McAllister
Oxford Centre for Real Estate Management, Oxford Brookes University,
Oxford, UK
Keywords Integration, International business, Investment, Segmentation
Abstract This paper analyses trends in direct international property investment by British
investing institutions in the 1980s and 1990s. Although it is well established that there is home
country bias in all investment sectors, evidence is presented which suggests that it is more
pronounced in the direct property sector. The main focus is on barriers to international property
investment and, therefore, potential sources of segmentation in the property sector. The research
addresses a number of issues relating to levels of international property investment, the linkages
between the nature of the core business and investment strategies and the relative importance of
high diversification costs. This is carried out by an analysis of the most recent data on British
institutional investment trends and by a survey questionnaire of British property professionals
involved in asset allocation decisions for the investing institutions. The results indicate that:
information costs are the most important barrier to international direct property investment, the
high cost of executing a global diversification strategy inhibits international property investment,
and institutions who have clients and see business opportunities in international centres are more
likely to be interested in international property investment opportunities. The data on asset
allocation trends support the view that the property market is significantly less integrated than the
other securities markets.
Introduction
Financial deregulation has been associated with a large increase in portfolio
investment in established and emerging international markets by British
investing institutions. This paper analyses trends in direct international
property investment by British investing institutions in the 1980s and 1990s in
this context. Although it is well established that there is home country bias in
all investment sectors indicating that there remains a degree of segmentation in
asset markets, evidence is presented which suggests that it is more pronounced
in the direct property sector. Such segmentation in asset markets is viewed as a
cause of inefficiency in that the resultant restricted investment universe
produces sub-optimal asset allocation decisions and reduces investor welfare.
The main focus of this paper is on barriers to international proper ty investment
and, therefore, potential sources of segmentation in the property sector. The
research concentrates on the UK experience in terms of analysis of investment
trends and empirical research.
Journal of Property Investment &
Finance, Vol. 17 No. 1, 1999,
pp. 8-26. © MCBUniversity Press,
1463-578X
Received 10 March 1997
Revised 18 March 1998
The research register for this journal is available at
http://www2.mcb.co.uk/mcbrr/jpif.asp The current issue and full text archive of this journal is available at
http://www.emerald-library.com
Academic papers:
Globalization
and property
9
The stimulus to this paper was derived from an analysis of existing
literature on direct international property investment trends and issues. The
author considered that previous research by Lizieri and Finlay (1995) and
Worzala (1994) had left a number of interesting points either unexplored or not
fully validated. This paper aims to examine and to make an original
contribution in three main areas:
(1) In the existing literature there are few data published or analysed on the
relative importance of direct international property investment relative
to either direct domestic property investment or relative to comparative
figures for bonds and equities. Given that in asset classes where there is
less segmentation investors will tend to have higher proportions of their
assets in international markets, there is an a priori expectation that
international investment will be higher in bond and equity markets due
to better transparency, liquidity and low cost of diversification in these
sectors.
(2) Previous empirical work has not mentioned the issue of high cost of
implementing a global diversification strategy as a barrier to
international property investment which was hypothesised as a factor
by Lizieri and Finlay (1995). This paper addresses the relative
significance of the lotting problem and other barriers to international
property investment.
(3) There has been limited consideration in previous research of the
potential of operational or strategic developments in core business
activities to affect investment strategies. For instance, a major US REIT
is diversifying internationally so that it has the capability to meet the
requirements of its tenants who are also internationalising (Billingham
and Wheatley, 1998). For investing institutions it is possible that
international activities of the core business may increase the likelihood
of international investment and increase market integration. It is
suggested that institutions with an international outlook in their core
business are more likely to be attracted to international investment
opportunities.
This paper addresses the points raised above in the context of sources of
segmentation in the property market. This is carried out by an analysis of the
most recent data on British institutional investment trends and by a survey
questionnaire of British property professionals involved in asset allocation
decisions for the investing institutions.
Globalization and investment
A study by McKinsey (discussed in The Economist, 1995) suggests that
international portfolio diversification is in its infancy and that there is “huge
scope for an increase in cross-border flows of savings as emerging economies
open up their financial markets and fund managers in developed countries
become more adventurous” (The Economist, 1995, p. 12). Other studies confirm
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