Interests and Behaviours of Real Estate Market Actors in Commercial Property Valuation

This book is a theory-led conceptual account of the Principal-Agent problem and related concepts of Behavioural Real Estate economics, a decade after the real estate crisis of 2008. Data from 52 qualitative interviews undertaken with appraisers, real estate brokers, and property owners is used to argue that the reality is more nuanced and influenced by the interests of the different real estate market actors. The book provides a sketch of the relationship dynamics between real estate investors and service providers in the markets of Austria and Central and Eastern Europe. While the investors manage real estate portfolios and have to deal with particular legal systems, regulations, and norms, they often appoint service providers who have a comprehensive understanding of the local context. This work aims to highlight that this relationship between the real estate market actors creates an information asymmetry that may constitute the basis of conflicts of interest as well as Principal-Agent problems. Furthermore, the work underlines that the services provided by appraisers and real estate brokers to investors may strongly influence the profit the investor can generate from a transaction. It could be therefore inferred that the investor inclines towards a certain type of result from a service provider over the others. The present research has revealed that the investors are guided by certain interests and undertake to steer the service providers in a favoured direction. This book is essential reading for anyone interested in the nuances of Behavioural Economics and real estate. This book is a theory-led conceptual account of the Principal-Agent problem and related concepts of Behavioral Real Estate economics, a decade after the real estate crisis of 2008. Data from 52 qualitative interviews undertaken with appraisers, real estate brokers, and property owners is used to argue that the reality is more nuanced and influenced by the interests of different real estate market actors. The book provides a sketch of the relationship dynamics between real estate investors and service providers in the markets of Austria and Central and Eastern Europe. While investors manage real estate portfolios and have to deal with particular legal systems, regulations, and norms, they often appoint service providers who have a comprehensive understanding of the local context. This work aims to highlight that this relationship between the real estate market actors creates an information asymmetry that may constitute the basis of conflicts of interest as well as Principal-Agent problems. Furthermore, the work underlines that the services provided by appraisers and real estate brokers to investors may strongly influence the profit the investor can generate from a transaction. It could be therefore inferred that the investor inclines towards a certain type of result from a service provider over the others. The present research has revealed that investors are guided by certain interests and undertake to steer the service providers in a favored direction. This book is essential reading for anyone interested in the nuances of Behavioral Economics and real estate. Cover 1 Half Title 2 Title Page 4 Copyright Page 5 Contents 6 Acknowledgments 10 Abstract 11 Acronyms and terminology 13 List of figures 15 List of annexes 16 1 Introduction 18 1.1. Relevance of the topic 18 1.2. Design of the interviews and theories behind 20 2 Information asymmetries, Behavioral Real Estate, ethics, and valuation 24 2.1. Information asymmetries 24 2.1.1. Market actors in commercial real estate 24 2.1.2. Principal-Agent theory 25 2.2. Behavioral Real Estate 28 2.3. Current ethics standards and codes of conduct 31 2.4. Commercial property valuation 33 2.4.1. Short note on commercial real estate 33 2.4.2. Real estate valuation and appraisal methods 35 2.4.3. Normative literature and standards for appraisers 37 3 Conducting the study: 52 interviews with appraisers, brokers, and owners 44 3.1. Interview setup 44 3.2. Data collection method and the issue of ethics 46 3.3. Data analysis 48 4 Findings for Behavioral Real Estate 51 4.1. Overview 51 4.2. The interests of market actors related to real estate organizations 52 4.2.1. Introduction 52 4.2.2. Advisors’ opinions related to real estate organizations 52 4.2.2.1. Positive opinions of advisors 52 4.2.2.2. Advisors’ motives not to have a membership 54 4.2.3. Clients’ opinions related to real estate organizations 55 4.2.3.1. Positive opinions of clients 55 4.2.3.2. Clients’ motives not to have a membership 57 4.2.4. Mandates received through real estate organizations 59 4.2.4.1. Advisors’ experience 59 4.2.4.2. Clients’ experience 59 4.3. Preliminary results related to real estate organizations 61 4.3.1. Results of the qualitative analysis 61 4.3.2. Results of the quantitative analysis 62 4.4. Behavioral Real Estate 64 4.4.1. Introduction 64 4.4.2. Valuation rationale 65 4.4.2.1. Brokers’ opinions and behavior related to valuation 65 4.4.2.2. Appraisers’ opinions and behavior related to valuation 69 4.4.2.2.1. Appraisers see flexibility in the valuation reports 69 4.4.2.2.2. Parameters that influence the valuation outcome 71 4.4.2.2.3. Appraisers see no flexibility in valuation reports 73 4.4.2.2.4. Pressure put on appraisers 74 4.4.2.3. Clients’ opinions and behavior related to valuation 75 4.4.2.3.1. Statements from the clients’ perspectives 75 4.4.2.3.2. Clients see flexibility in valuation reports 77 4.4.2.3.3. Parameters that influence the valuation outcome 78 4.4.2.3.4. Clients see no flexibility in valuation reports 79 4.4.2.3.5. Contact between valuation reports 80 4.4.2.4. Other market actors who play a role in the valuation process 82 4.4.2.5. Preliminary conclusions related to the valuation rationale 84 4.4.3. Anchors in valuation 85 4.4.4. The relationship between clients and advisors 87 4.4.4.1. Distinctions advisors make between clients 87 4.4.4.2. Long-term partnership between clients and appraisers 93 4.4.4.3. Client’s feedback in commercial property valuation 97 4.4.4.4. Relationships between market actors: summary 100 4.4.5. The generic value drivers of the real estate market actors 102 4.4.5.1. Investors’ value drivers 102 4.4.5.2. Brokers’ value drivers 105 4.4.5.3. Appraisers’ value drivers 108 4.4.5.4. Summary 110 5 Findings for Principal-Agent theory and moral hazard in real estate 113 5.1. Introduction 113 5.2. Before a binding or a non-binding agreement 113 5.2.1. Investors 113 5.2.2. Appraisers 118 5.2.3. Real estate brokers 119 5.3. After concluding a binding or a non-binding agreement 121 5.3.1. Investors 121 5.3.2. Appraisers 121 5.3.3. Real estate brokers 122 5.4. Conclusions 123 6 Conclusions 126 6.1. Results of the interviews and implications 126 6.1.1. Behavioral Real Estate 126 6.1.2. Principal-Agent problem and moral hazard in real estate 129 6.2. Conclusions 131 Annexes 133 Index 135 appraisers;,asymmetries;,Normative,literature;,Real,estate appraisers,asymmetries,Normative literature,Real estate