OUTLINE
Introduction
Investments in trophy buildings:
An analysis of economic and
non-economic factors
Characteristics
Economic factors
Presentation by
Fabian Spindler and Carsten Lausberg
Non-economic
factors
Empirical study
Conclusion
prepared for the 18th Annual Conference
of the European Real Estate Society,
June 15-18, 2011 in Eindhoven
Introduction
Introduction
Characteristics
Economic factors
Non-economic
factors
Empirical study
Conclusion
Definitions:
- Landmark building = a building which sets itself apart from other
buildings due to its outstanding architecture, location or other
characteristics
- Trophy building = a famous building with which the owner can adorn
himself
In this paper used synonymously!
Motivation: German open-ended investment funds are keen
investors in landmark buildings although the economics of this special
asset class are rather unclear.  Do they know what they are doing?
Objectives:
1. Identify key characteristics of landmark buildings
2. Investigate whether investments in trophy buildings pay off
© Spindler/Lausberg 2011, p. 2
Literature overview
Introduction
Landmark properties are the classic domain of disciplines like architecture,
urban planning, and construction engineering; example: Watts et al. (2007)
Characteristics
Still an exotic topic in real estate literature; landmark buildings are sometimes
mentioned indirectly, e.g., when the relationship between building features (size,
height, number of stories…) and economic variables (rent, cap rates, value…) is
studied; example: McDonald/Dermisi (2008)
Economic factors
Non-economic
factors
Empirical study
Conclusion
Pioneering works with connection to our research objective:
- Hough/Kratz (1983), Vandell/Lane (1989), Gat (1998)  rental premium for
high architectural quality in Chicago, Boston, and Tel Aviv
- Shilton/Zaccaria (1994),  price premium for size, height, and other features
in Manhattan
- Kurzrock et al. (2009)  value/yield premia for large buildings in Germany
- Fürst/MacAllister/Murray (2009)  rental premium for office buildings
designed by award-winning architects
- Dermisi/McDonald (2010)  price premium for fame and facade in Chicago
Other directions: Real estate marketing (Temelová 2004) and behavioral
economics, e.g., the influence of prestige and other non-economic factors on
real estate investment decisions
© Spindler/Lausberg 2011, p. 3
Characteristics of landmark buildings
Introduction
Location
Characteristics
Landmark buildings are typically to be found in prime locations,
particularly in the central business districts of the largest metropolises
Size
Economic factors
Non-economic
factors
Empirical study
Conclusion
- Extraordinary construction height (meter) or space (square meter)
- Point of reference
- Formation of the cityscape
Architecture
Unique features, so that the individual property will stand out from the
surrounding buildings
Image
- Positioning of the landmark building as an independent brand
- Distinguished from the bulk of other buildings
Value
- High construction costs, especially with increasing number of stories and
distinctive/unique architecture; as a result: high purchase price
- Top rents, especially on the upper stories
© Spindler/Lausberg 2011, p. 6
Key Characteristics
Criterion
Indicator
Form
Location
Prominent/singular
address OR CBD
yes/no
Economic factors
Size
Height (m)
OR space (sq.m.)
1st percentile in
relevant market
Non-economic
factors
Architecture
Prominent architect
OR singular design
yes/no
Image
Well-known brand
name
yes/no
Value
Construction costs
OR purchase price
OR rent per sq.m.
1st percentile in
relevant market
and period
Introduction
Characteristics
Empirical study
Conclusion
© Spindler/Lausberg 2011, p. 7
Safety
Introduction
Characteristics
Figure 1: Preferences of German institutional investors
[Funke/Gebken/Johanning (2010), p. 7]
100%
80%
Economic factors
Safety
60%
Liquidity
40%
Non-economic
factors
Empirical study
Return
20%
not specified
0%
2005 2006 2007 2008 2009 2010
Assumptions
Conclusion
- Specific risks: High construction costs, long duration, high leverage
(with huge potential gains), difficulty to diversify (bulk risk)
- Market risks: Higher volatility of top rents, lower vacancy risk
Miller et al. (2003): Rental and value losses for famous landmark
buildings after 9-11 terrorist attacks
© Spindler/Lausberg 2011, p. 8
Liquidity
Introduction
Asset Liquidity
Characteristics
Typical characteristics are timing costs, market organization, transaction costs
and valuation diversity.
Economic factors
Non-economic
factors
Empirical study
Conclusion
As a result, there is a uncertainty of the future liquiditation process
regarding time and proceeds from the sale
Market Liquidity
- Market breadth:
Large differences in pricing due to the high market value
- Market depth:
Market of landmark buildings are more illiquid than
other investments (in 2010, for example, only six
landmark buildings in New York City changed owners)
Inability to sell quickly
© Spindler/Lausberg 2011, p. 9
Return
Introduction
Characteristics
Assumptions about the most important factors:
Acquisition
Economic factors
- High purchase price due to the high construction costs
- Investors need to be clear that they will pay a premium for
extraordinary construction height and prestige
Non-economic
factors
Rental income
Empirical study
Conclusion
- Pressure on higher rental income compared with ordinary office
buildings because of considerable acquisition and maintanance
costs
- Top rents are generally achieved only on the upper stories
Sale proceeds
Pressure on estimated sale proceeds due to the high acquisition
costs
© Spindler/Lausberg 2011, p. 10
Non-economic factors
Introduction
Characteristics
Economic factors
Non-economic
factors
Empirical study
Prestige = respect or esteem from other people (Maslow 1943)
- Subjective component (evaluation according to the values of the
society) and objective component (importance that a person or a
firm derives from this for herself or others)
- Not necessarily contrary to economic objectives, e.g., prestige
important to canvass new customers
Power = the ability of an actor to realize his or her will in a social
action, even against the will of other actors (Weber 1946)
Assumptions:
Conclusion
- Investment funds and their managers can increase prestige and
power by buying trophy buildings
- Decision-makers with strong prestige or power motives tend to
prefer trophy buildings due to the possible increase in prestige or
power respectively
- Non-economic factors occasionally dominate economic factors
© Spindler/Lausberg 2011, p. 11
Empiricial study, part one: Survey
Introduction
Characteristics
Economic factors
Non-economic
factors
Empirical study
Methodology: Survey among decision-makers
- Online questionnaire (anonymous)
- 14 closed and open-ended questions
- Invitations were sent to 154 portfolio managers; selection criterion:
internationally operating real estate company
- All potential interviewers were contacted personally over a business
platform (www.xing.com) or via email including online link for the
survey
- Total population unknown  not representative
- Response rate 55% (n=84)
- July/August 2010
Conclusion
Description of the sample
- 80% work in real estate investment, 20% in asset management
- 55% fund managers, 18% asset managers, 27% other functions
- 91% experience with landmark properties, 9% no experience
© Spindler/Lausberg 2011, p. 12
Empiricial study, part one: Survey
Introduction
Characteristics
Economic factors
Non-economic
factors
Empirical study
Results
- Landmark buildings compared to ordinary office buildings:
No significant advantages with reference to sale opportunities (in periods
of economic difficulty), income retun and capital growth return
Advantages with reference to vacancy risk
Risk factors: small number of potential buyers, high price, leaseability and
financing
- Investment decision in landmark buildings:
Liquidity as a risk factor plays a medium role
Prestige and marketing purposes are important factors
- Prestige-oriented tenants are willing to pay top rents
Conclusion
- Most important advantages and disadvantages of investing in landmark
buildings:
Advantages: stable market value, prestige, leaseability
Disadvantages: low return, high operating expenses, high investment
volume
© Spindler/Lausberg 2011, p. 13
Empiricial study, part one: Survey
Introduction
- Evaluation of the purchase criteria to an investment decision in landmark
buildings (Scale: 1 important to 5 unimportant ):
Characteristics
Economic factors
Non-economic
factors
prestige
2.10
marketing purposes
2.10
return
2.40
strong liquidity position
2.80
Empirical study
diversification
Conclusion
2.90
powerful position of investor within the industry
3.00
gut instinct
3.30
0
1
2
3
4
© Spindler/Lausberg 2011, p. 14
5
Empiricial study, part two: Data analysis
Introduction
Characteristics
Economic factors
Non-economic
factors
Empirical study
Conclusion
Methodolgy: Data analysis
- Identification of landmark buildings according to our list of key
characteristics from investor reports, annual statements, property
fact sheets, and other publicly available documents; in addition:
information from expert interviews
- Collection of data from the same sources
- Mainly simple comparisons and descriptive statistics
Data:
- Property data of 31 landmark buildings from publicly available and
private sources: Total return, capital growth, rental income, vacancy
rate, building features
- IPD real estate indices for Austria, France, Germany, Holland,
Japan, UK, and USA; NCREIF Property Index for USA
- 2006-2010, annual data
© Spindler/Lausberg 2011, p. 15
Empiricial study, part two: Data analysis
Introduction
Characteristics
Average returns of all landmark buildings in the sample:
2010
6,6%
2009
6,4%
Rental Income
2008
2007
6,3%
6,1%
2006
5,7%
2010
0,7%
Capital Growth
2009
2008
2007
0,4%
1,2%
3,3%
2006
3,5%
2010
7,2%
2009
6,8%
Total Return
2008
2007
6,4%
9,3%
Economic factors
Other results:
Non-economic
factors
Empirical study
Conclusion
Positive results for 231 out of 291 figures (= 79%), whilst 48 are
negative
Strong performance in 2006 and 2007
Solid performance in periods of economic difficulty
Average total return 7.7%
No negative returns on average
Stable income return
© Spindler/Lausberg 2011, p. 16
2006
8,7%
Empiricial study, part two: Data analysis
Introduction
Characteristics
Economic factors
Non-economic
factors
Empirical study
Conclusion
Landmark buildings compared to office building indices
- Returns were greater than the respective benchmarks in most
years, especially in 2008 and 2009
- In absolute figures: 191 out of 289 positive (= 66%)
- Capital growth return and total return show higher differences than
income return
Link tables
- Difference between index return and property return
- Descriptive statistics for difference between index return and property return
- Relationship between the returns for landmark buildings and the indices
© Spindler/Lausberg 2011, p. 17
Empiricial study, part two: Data analysis
Introduction
Risks
Characteristics
Economic factors
Total return
15%
STD: 8.1%
Non-economic
factors
10%
STD: 1.3%
Empirical study
Landmark
Buildings
5%
Indices
Conclusion
0%
2006
2007
2008
2009
2010
-5%
© Spindler/Lausberg 2011, p. 18
Empiricial study, part two: Data analysis
Introduction
Vacancy rate:
Characteristics
12.0%
Economic factors
Ø:8.3%
10.0%
Non-economic
factors
8.0%
Ø:4.9%
Empirical study
6.0%
Landmark
Buildings
Office Buildings
4.0%
Conclusion
2.0%
0.0%
2006
2007
2008
2009
2010
© Spindler/Lausberg 2011, p. 19
Conclusion
Introduction
Stable income return
Stable market value especially during difficult economic times
Characteristics
Economic factors
Non-economic
factors
Total return shows a less volatile progression compared to office
buildings
Lower vacancy rate
Prestige plays an outstanding role
Empirical study
Landmark buildings represent a qualitative and alternative
real estate investment
Conclusion
There are many benefits to investing in landmark buildings
compared to ordinary buildings
BUT: More data needed for more reliable and precise
conclusions
© Spindler/Lausberg 2011, p. 20
Questions or Comments?
Contact information:
Campus of Real Estate
Nürtingen-Geislingen University
Parkstr. 4
73312 Geislingen, Germany
Fabian Spindler
[email protected]
Phone: +49 17 73 09 14 60
Dr. Carsten Lausberg, M.S.
Professor of Real Estate Banking
[email protected]
Phone: +49 89 41 92 92 14
Empiricial study, part two: Data analysis
Introduction
Difference between index return and property return (in basis points)
Characteristics
2010
Austria
Wien 1
Wien 2
France
Greater Paris 1
Graeter Paris 2
Paris
Germany
Frankfurt 1
Frankfurt 2
Frankfurt 3
Frankfurt 4
Hamburg 1
Hamburg 2
Hamburg 3
Holland
Amsterdam
Den Haag 1
Den Haag 2
Rotterdam
Japan
Osaka
Tokio
UK
London 1
London 2
London 3
London 4
USA
Houston
New York 1
New York 2
New York 3
San Francisco
Economic factors
Non-economic
factors
Empirical study
Conclusion
Rental Income
2009
2008
2007
2006
2010
Capital Growth
2009
2008
2007
2006
2010
Total Return
2009
2008
2007
2006
180
80
80
120
140
110
160
-
140
-
-120
-120
120
70
360
210
160
-
-220
-
60
-40
200
190
510
330
310
-
-90
-
40
-10
-390
-190
-20
10
40
10
630
40
-60
-10
-170
-360
-380
-410
580
1700
490
1220
1350
1310
-700
-820
-840
-1500
-340
-410
-810
430
1710
540
1300
1410
1980
-710
-940
-940
-1750
30
0
-20
80
50
20
-20
-130
-60
20
30
100
-100
-40
50
50
160
-30
70
60
-10
-10
70
50
190
340
-1400
0
200
190
310
380
-850
100
-110
40
200
390
110
200
20
330
-160
200
90
200
430
540
80
190
-1420
80
240
350
370
-950
60
-70
80
310
290
80
260
70
490
-190
270
180
220
440
640
200
-20
-50
-40
120
-220
-110
-80
140
-70
-50
-80
30
-
-110
-
60
290
320
440
470
700
480
890
370
930
550
740
-670
50
650
-
10
720
-
280
290
290
420
640
530
420
860
540
510
730
-780
650
-
-120
-
-
50
-140
210
40
-
-
-
650
520
2230
2230
-
-
-
760
440
2460
2290
-
-
-210
-80
-60
-20
-180
-100
-60
30
-110
-20
170
30
-70
90
70
100
50
-90
-360
-210
-370
1230
820
800
1390
430
1280
3230
260
560
-690
880
-1860
-790
-350
-480
-320
-450
1080
760
780
1460
450
1390
3530
420
420
-680
870
-1840
-830
700
360
140
680
490
180
-440
610
490
360
100
360
220
-140
-200
200
1040
-590
-580
3590
3230
2260
-50
960
3490
2890
-1100
2910
-2840
-1830
600
1190
-1700
1720
-250
-460
4390
3840
2560
-450
1610
3420
-830
2930
-2560
-1670
400
930
-1570
back
© Spindler/Lausberg 2011, p. 22
Empiricial study, part two: Data analysis
Introduction
Descriptive statistics for difference between index return and property return
Characteristics
2010
Maximum (bps) 700
Average (bps)
46
Minimum (bps) -390
Abs. frequency
of excess return 10
(no.)
Rel. frequency
of excess return 50
(%)
Economic factors
Non-economic
factors
Rental Income
2009 2008 2007
680
630
360
21
90
83
-220 -440
-80
2006
220
14
-200
2010
1040
-81
-1400
Capital Gain
2009 2008 2007 2006
3590 3490 2910 1190
862 1039
-76
-331
-850
-50 -2840 -1860
2010
1720
-80
-1420
Total Return
2009 2008 2007 2006
4390 3530 2930 930
928 1066
-45
-429
-950 -450 -2560 -1840
11
15
11
7
10
21
23
9
8
10
21
21
8
6
48
68
73
50
45
91
96
56
53
48
91
95
53
43
Empirical study
Conclusion
back
© Spindler/Lausberg 2011, p. 23
Empiricial study, part two: Data analysis
Introduction
Relative relationship between the returns for landmark buildings and the indices
Rental Income
Characteristics
Total Landmark
Buildings (bps)
Economic factors
Ratio (%)
Capital Growth
2010 2009 2008 2007 2006
2010
1866 1817 2793 1493 840
3112 20791 24972 5768 3772
68
58
77
87
56
38
2009
96
2008
Total Return
100
2007 2006
45
30
2010
2009
2008
2007 2006
3640 22404 23880 6015 2817
41
96
98
47
24
Non-economic
factors
Empirical study
Conclusion
back
© Spindler/Lausberg 2011, p. 24