Office buildings in Germany. The influence of the employment structure on market selection by institutional investors
| DOI | https://doi.org/10.1108/JPIF-10-2012-0051 |
| Date | 02 August 2013 |
| Pages | 402-417 |
| Published date | 02 August 2013 |
| Author | Jan Armin Schubert |
| Subject Matter | Property management & built environment |
ACADEMIC PAPER
Office buildings in Germany
The influence of the employment structure on
market selection by institutional investors
Jan Armin Schubert
Department of Cultural and Regional Geography,
University of Trier, Trier, Germany
Abstract
Purpose – According to normative-rational investment decision models, investors who seek office
buildings should select markets which show high employment numbers in office related sectors such
as Finance, Insurance, Real Estate (FIRE) and Knowledge Intensive Business Services (KIBS). This
view is challenged by behavioural studies, which find that the investors’ willingness for analysis and
the structure of their decision-making processes in practice notably limit such an influence. Looking at
German office markets, the purpose of this paper is to explore to what extent the aforementioned
connection between employment structure and market selection holds.
Design/methodology/approach – Qualitative interviews with German investment experts are
analysed in a manner that differentiates between investor types. Behavioural economics form a
theoretical basis to identify investor type specific attitudes towards investment markets and the
resulting market selection processes. The findings are tested by logistic regressions which connect the
spatial structure of office investments with employment data.
Findings – A sector-specific employment structure does not have a direct but an indirect influence on
the market selection. The existing theoretical contradiction is resolved by this indirect influence. Investor
type specific risk profiles and business models determine varying spatial patterns of market selection.
Research limitations/implications – The study shows that attitudes towards markets, business
logics and decision processes differ between insurance companies and open-ended funds. Researchers
should be aware that empirical results may not always be valid for all institutional investors. In some
cases a differentiating research design according to investor type may be necessary.
Practical implications – Thestudy identifies a set of minimum requirements with regard to building
and market characteristics open-ended funds use for filtering in German secondary/regional markets.
Market selection by these funds and insurance companies correlates with relative employment in FIRE-
and KIBS-branches.
Originality/value – This paper overcomes decision-theoretical contradictions and gives empirical
evidence for the importance of the employment structure on market selection.
Keywords Real estate, Investments, Office buildings, Germany, Decisionmaking,
Behaviouraleconomics, Office investment markets,Secondary markets
Paper type Research paper
1. Introduction
In services- and information-societies, office buildings are the typical place of work.
Today many companiesprefer to invest their resourcesinto their core business instead of
own real estates. Thus, they rent office spaces according to their current needs. As a
consequence institutional real estate investors have become important players to
businesses and communal governments. They influence the location and the technical
equipmentof new office buildings.As lessors they decide aboutrents and refurbishments.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Received October 2012
Accepted January 2013
Journal of Property Investment &
Finance
Vol. 31 No. 5, 2013
pp. 402-417
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-10-2012-0051
JPIF
31,5
402
In Germany, the spatial structure of institutional investors’ office investments is not
fully known.Furthermore, it is not clearly understood how and why marketsare selected
in practice. According to normative-rational investment decision models investors
should consider employment figures when they decide where to invest (Dziomba et al.,
2007; Roberts and Henneberry, 2007). Specific sectors such as finance, insurance, real
estate (FIRE) and knowledge intensive business services (KIBS) should be of primary
interest, since they are likely responsible for a large share of the past and recent office
demand (Fainstein, 2001; Sassen, 2001; Strambach, 2007). However, studies with a
behavioural-economic point of view suggest, that the employment structure is neglected
during the decision-making process. There is evidence that real estate investors limit
their use of market information and orientate their market selection on their business
networks, personal experiences and market trends (Gallimore et al., 2000; Scharmanski,
2009). Additionally decision-making processes generally seem to discard regional
markets right fromthe start and to show only limited interestin the analysis of regional
differences as a study among French and German investors has concluded (Roberts and
Henneberry,2007). Since the two strands of decision theory displayedcome to conflicting
results, this issue was picked up as the basic research questionfor this study:
RQ1. What influence does a branch-specific employment structure have on market
selection by institutional investors?
The paper sets out with a presentation of the so far existing evidence on real estate
investors’ market selection in Germany. It proceeds by extracting the relevant research
matters which are needed to address the fundamental research question and illustrates
the data and methods used. Then the data is analysed and structured according to the
selected research matters. In conclusion the essential results are summed up and their
implications are related to the importance of the employment structure, to market
development and to market selection in Germany and other countries in general.
2. Investors’ selection of office markets in Germany
2.1 Employment structure and real estate investments
The case-studies by Sassen (2001) and Fainstein (2001) have shown that global cities
attract investments in office buildings because they have high employmentlevels in the
FIRE- and KIBS-sectors. Companies in these sectors often exhibit a high demand for
modern office space and are therefore relevant hirers for investors (Brounen and Jennen,
2009; Hamnett, 2003). In some countriesthere are indications that the connection between
these employment sectors and office investments also exists in cities of lesser status.
Several studies by Pramerica real estate investors between 2004 and 2010 have
analysed data from the NCREIF property indexand observe the geography of real estate
investments in the USA (Byrne and Lee, 2011; Fiorella et al., 2010; Hess and Liang, 2005;
Hess and Ruggiero, 2009; Smith et al., 2004). They observe that metropolitan areas
chosen by real estate investors have specific and repetitive economic characteristics,
which among other factors can be usedfor clustering. The clusters “New York Corridor”,
“Tech Centers”, “Southern Growth” and “Southern California” are either centers of the
financial sector or of the KIBS based economy. They attracted about 61 per cent of the
investments covered by the NCREIF property index in the first quarter of 2010. Among
the metropolitan areas of every clusterare the so-called anchor markets, which form the
core of property investment. In the beginning of 2010 the nine anchor markets held
Office buildings
in Germany
403
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