Incentive and remuneration structures for Real Estate Asset Managers

The paper at hand analyzes the remuneration structure of Real Estate Asset Management services for Institutional Investors in Germany, both theoretically and empirically. Based on the Principal-Agent Theory as part of the new institutional economics, an adequate incentive and remuneration structure is ñ among others ñ a possibility to reduce conflicts between an Institutional Investor (Principal) and an ñ internal or external ñ Real Estate Asset Management (Agent). This could result in an alignment of interests between the two parties and a reduction of opportunistic behavior of the Real Estate Asset Management unit. Consequently a variable, performance-based remuneration system reflects the interests of the Institutional Investor and the Real Estate Asset Management, as the total income for the Real Estate Asset Management increases or decreases with its performance, meaning the performance of real estate values. Within the conducted theoretical analyses, 36 key variables for Real Estate Asset Management services are distracted from literature and classified afterwards based on the areas of strategy, transaction management, object management and controlling. Secondly, the optimal remuneration/ incentive structure for Real Estate Asset Management services are analyzed and different possibilities are shown. In a further step, these findings are analyzed empirically within a study focusing on the 36 key-variables for Real Estate Asset Management services. Within this empirical part, the research project focuses on life insurance companies, pension funds/ staff pension funds and pension schemes of the liberal professions for members of professional associations, that own direct real estate valued at more than Ä 26,5 bn (book-value) in total in 2009 and plan ñ as recent surveys confirmed ñ to further increase investments in real estate as real estate. Therefore, a questionnaire with 15 questions and several sub-questions was sent to all institutions and associations registered in Germany. The questionnaire was split up into 5 parts focusing on different areas of Real Estate Asset Management e.g. general information about the investments in real estate, general insights in the Real Estate Asset Management and remuneration/ incentive structures for Real Estate Asset Management tasks. In total, 37% of the relevant institutions answered the questionnaire. They were grouped into 3 different clusters based on the WARD-method (hierarchical method) and the k-means-method (iterative method) for cluster analyses. Using these three clusters, the remuneration structures for Real Estate Asset Management services were analyzed. It can be observed that ñ in general ñ a variable, performance based remuneration structure is not seen as a major criteria for an alignment of interest between the Institutional Investor and the Real Estate Asset Management. But, in the three different groups, different attitudes towards a performance based remuneration structure can clearly be observed. Furthermore, for some selected services, a variable remuneration structure is dominantly preferred.