Market Structures and Transaction Costs in Commercial Real Estate

Investment: a multi-method approach

David ScofieldDepartment of Town and Regional PlanningUniversity of Sheffield

d.scofield@shef.ac.uk

Research supported by the Investment Property Forum Educational Trust and the Economic and Social Research Council

23-04-21© The University of Sheffield

...to consider the functioning of the investment market from a transaction cost economics perspective and apply social capital ego-network theory to explain transaction cost disequilibrium as observed through comparative case studies in the UK and the US.

Transaction cost economics - institutional economics and game

theory: relies heavily on comparative analysis

ObjectiveObjective

Transaction Cost Economics

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Asset Specificity Frequency Bounded Rationality

Opportunism(“self interest seeking with guile”)

Intermediaries (agents/brokers)attenuate risk – “push the deal through”

Williamson 1979, 2007

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UK/US Comparative Studies (39 interviews)

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Off market transactions

Fund anonymity “exclusive” ,

tailored introductions

Wider network of serious buyers

Who do the agents really work for?

An institutional example?

Social Capital Ego-Network Theory

knowledge flow and risk mitigation

Structural Holes and Brokerage

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Social capital ego-network design affects knowledge flow and information brokerage opportunities (Burt 1995,

2007; Flap 2004; Lin 1999, 2008)

Survey:Survey:

Two countries – three subjects (Director/VP Acquisitions)

Tests for constraint and density

Similarities:Similarities:

age (37, 40, 43) investment remit investment scope (acquisitions outside their home/work

location networks...

Mapping the Network

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Name Generation Eleven questions – alter list

Interpretation Names – (incl. age, education, position,

location, professional affiliations...) Tie strength – emotional closeness (1-4);

from “ego” to “alter”, and between “alters”

Most valued contacts: UK:7 (each); US: 6

Differences: geography; group associations; inner-outer

network layer

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Geographic Constraint

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UK – twice the level of geographical constraint in acquisition networks – very ‘London-centric’

US – geographically dispersed network – key contacts throughout investment region

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Ego-Network Ego-Alter: memberships in common

(RICS, REIAC, CCIM)

Institution A 93% (13/14) - RICS

Institution B 92% (12/13) - RICS

Institution C 21% (5/24) – REIAC and CCIM

Memberships in Common

UK – 92-93% of alters listed share membership in common – RICS

US – 21% of alters listed share membership in common -- CCIM, REIAC

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In Sum:In Sum:

• The individual networks involved in institutional commercial property investment in the UK study are more constrained than that found in the US study based on a number of constraint measures.

• Social capital ego-network theory posits that network constraint effects the efficiency of knowledge and information flow through the network

• Higher levels of constraint are positively correlated with higher incidence of bounded rationality – which can lead to more incidence of opportunism during the exchange

So?

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Does the differentiated agency system in the UK offset the constraint (and greater bounded rationality) in London based investment networks?

Maybe.