Exploring Office Investment Decision-Making in France, Germany and the UK

Studies on UK and US property investment markets have historically been portrayed the decision-making process as an exercise in rational analysis. This notion is fundamentally flawed because the concepts of a perfect market and of perfect information used in modelling decision making in the rational literature are theoretical and are not applicable to a real world context. The process of investment decision-making is not a clinical, methodical exercise but a process undertaken by imperfect players in imperfect markets, using imperfect information. This paper explores the decision making processes of investors working in different contexts and the heuristics that they adopt to deal with their complex operational environments. Heuristics are used by many different actors to help them make a wide range of decisions (Eiser and White, 2004). In property, research on heuristics has previously been limited to the field of valuation (Diaz, 1990; Diaz, 2002, Gallimore et al., 2000; Diaz et al, 2004,). The paper extends this work into the investment sector. The findings of in-depth case studies of investment decision-making relating to office property across three European countries, France, Germany and the UK, are presented. They indicate that the decision-making processes of institutional investors deviate significantly from the normative models suggested in the literature (Eilon, 1969; Tyebjee and Bruno, 1984; Pyhrr et al., 1989; Hargitay and Yu, 1993). Although the specifics of these decisionmaking processes were found to vary with national setting, the outcome and the resulting influence do not. Investors were found routinely to make use of market sentiment (subjective and social factors) to aid their decision-making in the light of imperfect information in the market. The potential implications of these findings are wide-ranging. Investors and the context in which they are working are subject to a two way feedback process. Markets influence the actions of the actors who operate within them but also, in turn, reflect the behaviour of those actors in subsequent patterns of investment. Investors in each national context reveal a distinct preference for office property in core markets. Consequently, institutions may have had a distorting effect on the property markets in which they are operating; inhibiting the growth of weaker property markets and marginalising peripheral regions. Such markets are largely ignored in geographical diversification decisions and, potentially, this may have inhibited their economic growth, physical development and subsequent ability to compete with other, more favoured markets. Increased understanding of investors' decision-making processes and the influences upon them leads to a better appreciation of the issues faced by peripheral markets.