Strategic Alliance and Submarket Choices of Commercial Real Estate Investors – A Multinomial Approach

Abstract

This study explores the strategic entry modes of overseas investors in commercial real estate market, specifically, whether if the market entry and partnering decisions of foreign investors get affected by the participation of peer investors. Existing literature in international business suggests investors tend to follow the choice of their peer group so that to acquire the local information through peer business network. As an alternative, aligning with partner benefits foreign investors on accessing local information via partner(s), also sharing the cost and risk; however, research from corporate finance and international investment addresses that one need to balance this benefit with partner's potential hazard of opportunism. This study conducts multinomial logit model with commercial property transaction data in London, Manchester, Midland and Yorkshire from 2001 to 2015. Empirical results confirm the different choices among foreign and UK investors on submarkets, and show evidence that foreign investors incline to conduct investment independently instead of partnering with a UK investor when a larger group of peers that share similar socioeconomic backgrounds had participated in previous 3 years; this supports the hypothesis that investors adjust their investment strategy ex ante when they anticipate the potential agency issue and moral hazard in partnership in foreign market where information access is limited. The effects, however, varies between London and non-London area in terms of submarket selection, where there is subtle result in non-London area reflecting pure foreign consortia may stay within fringe of cities while UK-foreign consortia incline to explore peripheral markets; on the other hand, UK-foreign consortia have broader market horizon in London sample and have higher probability on exploring the submarkets outside "core" (West End, City and Canary Wharf) area. This study provides insights on asset allocation and market entry strategies of commercial property investors by bridging international business theories with real estate investment. It also leads to a further discussion on the composition of investment group and its influence on the liquidity and market cycle of commercial real estate market.