What influence domestic and overseas developers’ decisions?
| DOI | https://doi.org/10.1108/JPIF-12-2018-0092 |
| Pages | 153-171 |
| Date | 27 February 2019 |
| Published date | 27 February 2019 |
| Author | Huiying Hou,Hao Wu |
| Subject Matter | Property valuation & finance,Real estate & property |
What influence domestic and
overseas developers’decisions?
Huiying Hou
Department of Hotel and Tourism Management,
The Chinese University of Hong Kong, Hong Kong, and
Hao Wu
Department of Architecture Building and Planning, The University of Melbourne,
Melbourne, Australia
Abstract
Purpose –Foreign firms entering into the domestic real estate industry and foreign investment control are
significant in global hot markets such as Australia. Despite their market impact and policy sensitivity,
developer choice is rarely studied. The purpose of this paper is to study domestic and overseas property
developers for their motive and preference in response to market growth and market barriers including
regulatory constraint.
Design/methodology/approach –International trade theory suggests local and overseas firms can vary
significantly for their risk profile when engaging in location-specific development opportunities. Using a
comprehensive decision factor system for the residential development process, the authors conducted an
experimental survey to collect the prime data to measure stated preference of domestic and overseas
developers in the context of the Melbourne residential market.
Findings –Results suggest high c onsistency between the samples of domest ic and overseas developers.
Possible explanatio ns include vertical int egration by innovat ive contracting, str ict regulatory cons traint
dictates domestic an d overseas firms’preference or sample selection bias. This micro-analysis of developer
stated preference hig hlights their entrepre neurial ability to comb ine substitution and integration for
innovative contract ual strategy. This abil ity to join asset holdin g and project managem ent enables firm
flexibility to mitiga te business risk in rapidly globalising ca pital and factor markets.
Practical implications –These insights of firm-level decision making contribute to the decision literature
of real estate developers and are relevant to the broader literature of industrial economics and international
trade. Government may evaluate policy strategies based on the explicit entrepreneur (e.g. developer)
preference for their “comparative advantage”.
Originality/value –This paper highlights developer's ability to jointly consider investment and project
management for decision making. It found that other than political cost such as national interest and domestic
interest group pressure, domestic and overseas developers in the Melbourne residential market actually think
quite alike. It suggests that irrespective of property ownership conditions, market integration occurs in the
Melbourne residential sector.
Keywords Entrepreneur, Overseas, Domestic, Stated preference, Property developer, Residential market
Paper type Research paper
The economic prosperity in Australia is evident (The Economist, 2017). Also observed is the
rising market influence of real estate developers whose business origin is overseas. In the
2016 financial year, they have contributed to 48 and 46 per cent of residential projects in
Sydney and Melbourne, respectively (Knight Frank, 2016, 2017a). The rising global trade is
evident by China becoming a major consumer and investor attracts prime Chinese capital
and firms into the Australia economy (Kushman and Wakefield, 2018; Tevfik and Boey,
2014; KPMG, 2018; Knight Frank, 2017b). Since 2009, Chinese firms have been significantly
increasing direct investment in Australian residential markets (Rogers and Koh, 2017).
In 2016, $2.4bn Chinese capital was invested into Australian residential sites, a tenfold rise
from 2008 to 2016 ( Jones Lang LaSalle, 2017a, b). The Australian property boom attracts
global interest to the local markets, though domestic developers operate across submarkets,
while overseas firms appear more geo-sector constrained.
Journal of Property Investment &
Finance
Vol. 37 No. 2, 2019
pp. 153-171
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-12-2018-0092
Received 6 December 2018
Accepted 17 December 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
153
Domestic and
overseas
developers’
decisions
Policy and regulations are sometimes put in place to constrain the perceived risk of
foreign ownership and control of domestic capital. This is because international trade theory
implies a possibility of domestic industry decline or unemployment. Sometimes government
policy (regulation or subsidy) is necessary with higher relative efficacy to “protect”domestic
interest and market institutions (Demsetz, 1968). Domestic industry groups may advocate
the importance of defensive trade policy where protectionism appears in rising or declining
economies. Australia has federal and state level institutions to monitor the quantity and
mobility of overseas capital by the project type and/or location (McKissack and Xu, 2016;
FIRB, 2017). The project is subject to local planning constraints so a developer is discerning
to social signals to realise opportunities. It is risky for overseas firms to deliver projects in
an unfamiliar market as they are bounded by cultural norms, information channels, and
organisational structures. They also differ by taste and endowment when engaged in
projects in specific markets.
Given the competitive edges of domestic and overseas developers, this paper
hypothesised that local and overseas firms differ in terms of their factor preferences for
locally based project decision. In other words, domestic and overseas developers think
differently due to differing resource constraints, capabilities, and private agendas. It is,
therefore, presumed that a barrier/constraint for the international mobility of capital and
labour takes effect at the firm level where the country of origin (headquarter) determines the
power hierarchy of decision. An experimental survey is set up for a small sample of
Melbourne residential development sector to test this theory. Results provide evidence that
the sampled developers “think alike”; they are similar in their project-wise stated preference.
It follows that if firms respond similarly to market signal, there is a weak economic reason to
discriminate foreign firms. There are political reasons to constrain foreign ownership and
control of real estate. These insights of firm-level decision making contribute to the decision
literature of real estate developers and are relevant to the broader literature of industrial
economics and international trade. Government may evaluate policy strategies based on the
explicit entrepreneur (e.g. developer) preference for their “comparative advantage”.
The paper is structured as follows. It reviews the recent literature on international trade
and property developer decision, by taking organisation structure and behaviour in a
general context. It then develops a conceptual (hierarchical) factor system to determine
decision drivers to emphasis the entrepreneurial role of developer. Guided by the
framework, it designs and conducts an experimental survey for a small sample of domestic
and overseas developers. Survey data are analysed to compare, score and rank individual
stated preferences of the developers. Discussion and conclusive remarks follow.
International trade and developer decision
International trade and state theories explain why organisations and asset holders are
motivated to engage in international resource exchange and collaboration. Specialisation in
production to achieve efficiency and productivity and economy of scale in consumption to
expand the market size are two often quoted reasons. The theories also attempt to explain
the nature of “global”transaction cost where risk at market, project and firm levels are
measured and evaluated. Both market choice and institutional structure influence firm
decision. Based on the comparative and competitive advantage principles, international
trade theory offers the basis to explain overseas property developers’decision-making
preference. The theory suggests that firms’relative competitiveness is strongly influenced
by the socioeconomic resources they are able to command; domestic and overseas firms are
subject to different resource controls, which provide them with comparative advantages.
Multiple factors such as financial capacity, firm experience, organisation culture, local
network, regulatory constraint and strategy affect the developer project decision. In an open real
estate market, home market effect becomes another factor relevant to the developer decision.
154
JPIF
37,2
To continue reading
Request your trial