Market Structures and Transaction Costs in Commercial Real Estate Investment: a multi-method approach David Scofield Department of Town and Regional Planning University of Sheffield Research supported by the Investment Property Forum Educational Trust and the Economic and Social Research Council

17/09/2015© 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 Objective

Transaction Cost Economics 17/09/2015© The University of Sheffield Asset Specificity Frequency Bounded Rationality Opportunism (“self interest seeking with guile”) Intermediaries (agents/brokers) attenuate risk – “push the deal through” Williamson 1979, 2007

17/09/2015© The University of Sheffield UK/US Comparative Studies (39 interviews) Similar Institutions and Structures Property assets £ 5 – £ 15 billion External brokerage structure Organization structures: buying centres, review by asset size Investments across geographies Except Differentiated brokerage: US = 1 UK = 2 UK: % gross*

17/09/2015© The University of Sheffield  Off market transactions  Fund anonymity  “exclusive”, tailored introductions  Wider network of serious buyers  Who do the agents really work for?  An institutional example? Efficiency Oligopoly

Social Capital Ego-Network Theory knowledge flow and risk mitigation

Structural Holes and Brokerage 17/09/2015© The University of Sheffield Social capital ego-network design affects knowledge flow and information brokerage opportunities (Burt 1995, 2007; Flap 2004; Lin 1999, 2008)Survey:  T wo countries – t hree subjects (Director/VP Acquisitions)  Tests for constraint and densitySimilarities:  age (37, 40, 43)  investment remit  investment scope (acquisitions outside their home/work location  networks...

Mapping the Network 17/09/2015© The University of Sheffield  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

17/09/2015© The University of Sheffield UCINET 6

17/09/2015© The University of Sheffield UCINET 6

17/09/2015© The University of Sheffield UCINET 6

Geographic Constraint 17/09/2015© The University of Sheffield UK – twice the level of geographical constraint in acquisition networks – very ‘London-centric’ US – geographically dispersed network – key contacts throughout investment region

17/09/2015© The University of Sheffield Ego-Network Ego-Alter: memberships in common (RICS, REIAC, CCIM) Institution A93% (13/14) - RICS Institution B92% (12/13) - RICS Institution C21% (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

17/09/2015© The University of Sheffield 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? 17/09/2015© The University of Sheffield  Does the differentiated agency system in the UK offset the constraint (and greater bounded rationality) in London based investment networks? Maybe.