Categories for Estate Management

Real Estate and Portfolio Investment

Real Estate Investment business deals with immovable property, such as land, and everything else that is permanently attached to it, such as buildings. C.F. Sirmans et.al. 2003, in his paper observed that there has been a lot of efforts by researchers and academicians in studying and attempting to model the benefits of establishing diversification strategies for portfolio investments. All previous works concentrated on combination of different stocks into a single portfolio. With the passage of time research has been extended into analyzing individual factors (like bonds, currencies, real estate, international stocks); recently researchers did make some new in-roads in the potential benefits of real estate investment strategies.

In the same article the same authors cited the work of other researchers who have worked on Modern Portfolio Theory (MPT; see Markowitz, 1959), who have attempted to model the benefits of establishing diversification strategies for portfolio investments. Initial work only focused on potential gains from combining different stocks into a single portfolio. But research has been extended into bonds, currencies, real estate, international stocks and bonds.

According to Henderson Investors (2000), next frontier for the individual investor would be international real estate. Although microeconomic theory of consumer choice and decision-making under uncertainty is highly developed and finds much empirical support from stock market data, data providing similar evidence for direct, private investment in real property have not been easy to obtain. Accordingly, research in this area is scarce. Yet, many private investors prefer building a portfolio of real property investment, since it is believed that it offers a higher risk adjusted return than financial assets. The aim of the current research is to address the risk associated in real estate shared investment.

1.2 Background

Over the years, many tools, processes and regulations have been created to give investors assurances that investment managers are weighing risks and evaluating potential returns in a fashion that is acceptable to investors. A large proportion of these mechanisms involve government regulation which

defines and enforces rules for regulated financial firms. Commercial banks, thrifts, broker-dealer firms, mutual fund companies, and insurance companies each have their own regulatory bodies and rules. Internally, these firms maintain staff to monitor and assure that the rules are obeyed.

Risk managers are charged with understanding, monitoring and controlling the new world of financial complexity. The definition of risk management has two separate parts. The first part defines it organizationally and the second part defines it functionally. Through widespread research on real estate investment trends, the risks associated with investing and the long term returns have been studied extensively (Springer, et al, 2005). It is essential that a potential investor has a thorough knowledge of “how to manage” the potential risks associated with an investment in real estate when analyzing the benefits of the potential investment. The specific risk factor variables can be tuned to suit the requirements and the particular real estate climate of the particular investment. The management of risks includes analysis of portfolio diversification, property age, specific demographics of the property locality, portfolio size and others.

Risks in real estate projects must be considered and should never be underestimated, because those tend to affect the whole project management processes, in terms of project programme delay, project cost overrun etc.

However, there is also a potential risk management technique, which can potentially affect the profitability of an investment: risk sharing. While the other risk management techniques focus on a single investing individual acquiring real estate, a group of partner investors may also choose to acquire real estate, with each having an interest in their investment. This concept of risk sharing changes the scenario as the burden of overall risk is split into the respective investment of each partner. Furthermore, this concept is different from the other concepts, especially if the dynamic nature of the real estate business is adapted in the modeling process because of the advantage of the shared contribution in the investment by various investing partners.

When a person acquires real estate, she/he also acquires a set of rights, including possession, control and transfer rights. Investment in real estate involves the commitment of funds to property with an aim to generate income through rental or lease and to achieve capital appreciation. However, the real estate income can be highly unpredictable and consequently investment in real estate is very risky as it is the case with investment in equity. One of the main reasons for the collapse of even the largest financial institutions, in the recent times, leading to the recession of major economies of the world is due to the collapse of the real estate business. This global crisis could have been prevented if the potential risk factors leading up to it had been identified at an early stage. But the risk assessment associated with this strategic investment was not properly followed. Thus, in order to be able to increase chances of investments in real estate returning profitable margins, it is critical that risk factors are identified and a proper investment strategy put into place.

Since real estate business involves immense risk owing to the requirement of mammoth funds devotion, the long operation period and the volatile markets, Brown (2004) attempts to explain as to why a potential investor would still consider investing in private real estate properties within a portfolio as opposed to conventional methods such as through the vehicles of REITs and stocks. He investigates the possible reasons for the private investor, especially in Tier II Properties (generally being apartment buildings between 4 – 100 dwelling units) as opposed to an investing institution or a pension fund. He concludes that (a) the private real estate market for “Tier II Properties” is inefficient and that (b) applying portfolio theory to individual parcels of real estate is, at best, a challenging task. At the practical level, high down payments, high transaction costs and lack of liquidity usually place forming a portfolio of private real estate assets out of the individual’s reach. On theoretical grounds, forming efficient set portfolios implies perfect liquidity, perfect divisibility and perfect reversibility. Even if the first two of these requirements are somehow met, the construction of a short sale of an individual parcel of real estate is impossible. Thus, a central value of the Markowitz (1952) model—being able to diversify away nonsystematic risk—is essentially unavailable to the private real estate investor.”

Furthermore, Brown (2004) states that the Tier II real estate market is defined to be privately owned investment real estate, holding a combination of ownership and control. Private real estate investing permits investors to influence the outcome. Hence, for these investors, probability is not purely random. In contrast to investing in other markets where investment is converted to financial assets, it is suggested that many prefer private real estate investment as they are more influenced by the dual factors of control and ownership. Mr. Brown also divided all other real estate two other tiers. Tier 1 is made up of smallest property containing 1 to 4 dwelling units, of which one is owner occupied. Tier 3 is the institutional properties where investment is converted to financial assets.

Roger Brown (2004) investigated the risk in real estate investment by conducting theoretical and empirical analysis of risk and returns accruing to individuals who were involved in real estate investments. Brown claimed that the returns are not normally distributed and that private real estate investors compensate for the distributional burdens their market imposes upon them by carefully assessing and controlling unavoidable non-systematic risk.

Brown’s work extends the work of Young and Graf (1996) by adding theoretical content, using different methods to generate return series, different technologies for estimating distribution parameters and investigating a real estate market with investors. Based on the concepts developed by Brown an attempt is made in this thesis to achieve the aim and objectives of the thesis as outlined below.

1.3 Aim and Objectives

1.3.1 Aim:

The aim is to develop operating rules by constructing a dynamic risk sharing mathematical model that to be used by a private real estate investor who would like to share the risk with his/her partners and yet earn a good margin.

1.3.2 Objectives:

A tested dynamic risk sharing mathematical model to be used by the Real Estate partners in order to reduce risk.

A process that will be used to update various estimates involved in the model from time to time to capture the dynamics of the real estate market scenario.

1.4 Research Approach

Throughout the course of this thesis, an attempt will be made to evaluate numerous research articles providing in-depth analysis of these categories. With the added hindsight that past research work has uncovered in these fields, it is hoped to develop the most optimal conditions for a strategic real estate investment model.

In view of the above, an important consideration will be to enhance the core competencies in risk management.

The first step in this regard is to develop a risk-shared dynamic mathematical portfolio selection model for real estate business to be used by private real estate Tier II investors. Using this model, simulation of various alternative operating rules will be carried out.

Based on the outcome of the simulation, a strategy for implementation for the selected alternative will be developed. This will then lend immunity to any private investor against market instability, and other macro factors which influence the real estate market to a certain extent. This will help the investors who would like to share the risk with his partners as well as earn a good margin.

Real-life data will be collected and will be used to test and validate the model.

Last, strategies for implementation will be developed.

1.5

Road Map

Chapter 1 presents the background of the chosen topic along with the aims and objectives, research approach

Chapter 2 presents a review of the existing literature detailing the hypotheses used and statistical and mathematical models used by the researchers in the past

Chapter 3 presents the methodology how the data will be collected which will be the back bone of dynamic risk-sharing mathematical model.

Chapter 4 presents the nature of the data collected and the methodology used for estimating the various parameters used in the mathematical model and test their sensitivity using appropriate hypothesis testing techniques.

Chapter 5 presents the operating decision rules derived by using appropriate non-linear mathematical programming technique.

Chapter 6 presents the sensitivity analysis of the parameters and the limits of the operating decision rules using simulation methodology.

Chapter 7 gives the strategies to be adopted for using the operating decision rules and the procedures for updating the parameters from time to time as required.

Finally, conclusions and future direction of studies are presented in Chapter 8.

Chapter 2: Literature Review

2.1 Introduction

Investment can be considered as the employment of capital in the acquisition of real estate or interests within for undeviating ownership or for definite use of the person acquiring it. Real estate investments in general take up an enormous amount of funds; hence it is important to device a method in order to safe guard the interest of the investor.

Throughout the course of this thesis, an attempt will be made to evaluate numerous research articles providing in-depth analysis of these categories. With the added hindsight that past research work has uncovered in these fields, it is hoped to develop the most optimal conditions for a strategic real estate investment model applicable for Tier 2. Although a broad review of the research work related to portfolio design and management in connection with real estate business is presented in Chapter 2, a discussion of the salient issues related to real estate business is presented here to justify the need for carrying out further research in the area.

2.2 What is everything everywhere (EE) Model?

DiBartolomeo, et al (2005) have constructed a model based on a popular linear model for financial assets, the “Everything, Everywhere” (EE) model, which breaks discount rate risk into two components; the risk of treasury curve movements and the risk of changes in credit related yield spreads while linking global public security to over 50 factors. The principle behind this model have been applied to a real estate scenario, where the authors have identified that traditional real estate appraisals utilize one of three basic methods to value a property: (a) replacement cost, (b) comparable sales and (c) capitalizing the expected income. The proposed model estimates the risk and correlation at both the property and portfolio levels. This will then allow a potential investor to analyze the potential risk corresponding to a possible investment as well as the particular risky components. The authors believe that by assessing risk directly through the model, they allow the problems associated with traditional risk evaluations to be averted.

2.3 Influence of Global Real Estate Crash

Goetzmann et al (1995) analyze the risks of international real estate diversification, with a particular focus on the factors leading up to a global real estate crash. The authors suggest that a real estate market crash of a global scale has more to do with economic and monetary factors than the local factors of a market. Traditionally, there has been a much reduced risk associated with investment across international real estate markets leading to international investment generating high yield returns. However, there has also been evidence of great decline in some international markets which prove contrary to this, showing that this type of diversification has some drawbacks that the authors try to address and analyze.

2.4 Return Due to Diversification (RDD)

It is well established so far that due to the volatility in the real estate markets investing entails enduring a certain amount of risk. Both practitioners and theoreticians recommend holding a well-diversified portfolio to reduce risk.

Lee (2005) states that return due to diversification (RDD) effect makes the U.S. direct real estate a particularly attractive investments for long-term investors. However, he also adds that the results are dependent on the percentage allocation to direct real estate and the asset class replaced. Lee proposes that the addition of real estate into the mixed asset portfolio not just enhances the compound return of the portfolio but also reduces the risk. He tests this hypothesis by using the annual returns in the U.S. over the period 1951 to 2001 and finds that real estate can indeed justify a higher allocation in the mixed-asset portfolio than its individual compound return would suggest.

Lee next outlines the method of Booth and Fama (1992) for estimating the RDD of an investment within a portfolio. Modern portfolio theory shows that the lower the covariance of an asset with a portfolio, the higher its contribution to reducing the risk of the portfolio and so the greater the attractiveness of the investment to the portfolio. Booth and Fama (1992) illustrate that it is this insight that explains why the contribution of an asset to the compound return of a portfolio is greater than the weighted average of the individual compound returns.

Lee concludes his study report by establishing that the effect on portfolio RDD from an allocation to direct real estate is positive when it replaces large cap stocks – debatable if it replaces bonds and detrimental if it replaces small cap stocks. Thus, the argument for including direct real estate in the mixed-asset portfolio need not rest on its diversification benefits alone. A case can be made for adding direct real estate to the mixed-asset portfolio based on its contribution to portfolio RDD and so the compound return, or terminal wealth, of the fund from which the institution could meet its future obligations.

However, Lee does not differentiate between public real estate and private real estate investments and their separate inclusion in the portfolio. It may be interesting to find effect on portfolio RDD from an allocation to private real estate.

2.5 Diversification of Investment

Diversification has long been recognized as an effective portfolio management technique. It is based on the idea that spreading investment risk across a mix of diverse assets (i.e. whose returns are not correlated with one another) produces better risk-adjusted returns over the long term. This improvement in risk-adjusted returns is by virtue of negative returns from some of the assets being offset by positive returns elsewhere.

According to Kwame et al (2002), “diversification of investment (especially when it includes international investments) can open up a wider choice of investment opportunities, give improved risk-adjusted returns and reduce volatility when the investment is in real assets. Since the benefits of diversification are maximized when there is a low correlation between the assets, a well-diversified portfolio would include assets that are either negatively or lowly correlated.

However, it would appear that the investment issue, which remains absorbing and the focus of a lively debate in the finance literature, is the rationale for the superior performance of contrarian investment strategy. Williams (1995) was the first to make implicit reference to the contrarian investment strategy by hypothesizing and demonstrating through statistical simulation that ‘‘the greater the relative balance of return from operating and reversion, the more diversified the portfolio, and thus the better the portfolio performance.”

Kwame et al (2002) modified the model to conform to the Markowitz routine, and found that the association between the cash flow concentration level and the portfolio performance index, and that between the diversification index and the portfolio performance index were stronger than depicted by Williams (1995). This implies that diversification by sources of return could improve real estate portfolio performance.

The results on the returns of various indices indicate a high degree of variability and uncertainty. Especially Equity REIT’s index shows a coefficient of variation with an average return ranging from 99.24% to 326.25%.

Kwame et al (2002) study, in conclusion, verifies Williams’ hypothesis that diversification by sources of return could complement the traditional diversification strategies to significantly improve real estate portfolio return.

Thus this review lends to the aim which suggests that diversification, in fact, could improve real estate portfolio returns, however what investment alternatives or parts thereof exactly ought to be the composition of the portfolio in order to optimize returns has not been elaborated on. That is, the degree of diversification and the extent to which inclusion of investment alternatives or parts thereof do not get mention in the study.

2.6 Contribution and Optimal Levels of Inclusion of Different Investments

The basic objective in developing a product portfolio is to maximize its return with minimum risk. In order to develop a portfolio with a low standard deviation signifying lower levels of risks, one needs to be familiar with the past development on the subject.

Based on a 25 year observation of direct private real estate (through NCRIEF equity index) and a 30 year observation for public real estate (through NAREIT equity Index) in assessing the return contribution in a mixed asset portfolio, Mueller and Mueller (2003) explore the contribution and optimal levels of inclusion of different investments in a return maximizing portfolio. The five time periods analyzed are the 5,10,15,20 and 25 year annual returns.

Substantial fieldwork has been accomplished in order to provide a foundation for the research paper.

Gilberto’s (1990) comparison of public and private real estate returns.

Mueller, Pauley and Morrill’s (1994) inclusion of REITs in a mixed-asset portfolio.

Miles and Tolleson’s (1997) revision of different public and private debt and equity investment alternatives.

14.Ziering and McIntosh’s (1997) study of the benefits of including both REITs and core real estate (using NCREIF returns) in a mixed-asset portfolio of stocks and bonds from 1972 to 1995.

Gordon, Cantor and Webb’s (1998) studies of the portfolio diversification effects of international real estate securities on a mixed-asset portfolio of U.S. stocks, corporate bonds, real estate securities and international common stocks.

Chua (1999) studies on the role of international real estate in a mixed-asset portfolio while attempting to control for higher taxes, transaction costs and asset management fees incurred when investing in real estate, as well as the appraisal smoothing in real estate return indices.

Gilberto, Foort, Hoesli and MacGregor’s (1999) test of the predictive powers of an optimal diversification strategy within a mixed-asset portfolio using a threshold autoregressive conditional heteroskedasticity model (QTARCH).

The above mentioned studies along with the findings of Ling and Naranjo (1999), Quan and Titman (1999), Ziering, Liang and McIntosh (1999), 19.Fu and NG (2001), Ciochetti, Craft and Shilling (2002) and Feldman (2003) had been critically analyzed in order to come to a viable conclusion. The analysis took into account returns, volatility, correlations and Markowitz efficiency frontier.

2.7 Real Estate Investment Trust (REIT)

Unlike real estate directly held by the investor, REITs are a liquid asset that can be sold fairly quickly to raise cash or take advantage of other investment opportunities. Using REITs, investors can diversify their holdings between various geographic areas and property specializations. REITs can tap the debt and equity markets and raise funds to take advantage of opportunities when they arise. REITs have a lower correlation to equities than many other asset classes, providing portfolio stability for those with an active asset allocation strategy. Serrano and Hoesli (2007) analyze the part played by financial assets, direct real estate, and the Fama and French (1993) factors in amplifying equity real estate investment trust (EREIT) returns and scrutinizes the expediency of these variables in forecasting returns. His study recognizes the assertion that equity REITs (EREITs) are investments whose fundamental assets are stocks, bonds, and real estate; thus uses aggregate substitutes for the set of economic and financial variables that would be useful in forecasting EREIT returns. Hence, the study by Serrano et al examines the leeway of making lucrative forecasts based on the conclusions that securitized real estate is a hybrid asset.

In order to determine the suitable model for making useful predications, Serrano and Hoesli (1993) use four models:

Capital Asset Pricing Model (CAPM) of Sharpe (1964);

CAPM with the Fama and French (1993) Factors;

Clayton and MacKinnon (2003) Hybrid Model; and

Clayton and MacKinnon (2003) Model with the Fama and French (1993) Factors

The study then examines the forecasting ability of the four securitized real estate return-generating models by employing three forecasting methods i.e. Time varying coefficient (TVC) regressions, Vector autoregressive (VAR) systems, and Neural networks models.

Forecasting accuracy has been measured with traditional statistical criteria, as well as by comparing active investment strategies based on the papers forecasts to a passive buy and- hold strategy. This helps determine not only which model specification is the most appropriate for securitized real estate forecasting, but also which forecasting technique makes the most accurate predictions. The methods used are Mean Error, Root Mean Squared Error, Mean Absolute Error, Directional Accuracy and Theil’s U2 Inequality Coefficient. In order to empirically validate the above mentioned measurement techniques, the researchers obtained data from Thomson Datastream except for the real estate series and the Fama and French (1993) factors. All indices used are quarterly total return indices for the period 1978– 2006. For securitized real estate, the FTSE NAREIT EREIT series is chosen. Datastream’s total market index is used for stocks, and the Merrill Lynch’s 7–10 year government bond index is used for bonds. As a risk-free rate, the Euro-Currency three-month middle rate is retained. The size and book-to-market factors have been provided by Kenneth French. Finally, the NCREIF Property Index (NPI) is used for direct real estate. Real estate returns are unsmoothed using the approach proposed by Geltner (1993).

The results of the above study recommended that EREIT returns are optimistically correlated to stock, size, and book-to-market factors. None the less, these associations are volatile, with stocks and size being overriding until the early 1990s, while the book-to-market and size factors dictate thereafter. With bonds, a usually positive but frail liaison is found, whereas with real estate, the relationship demonstrates much unpredictability and seems to be recurring. This study highlights the significance of models including the Fama and French (1993) factors, as well as the superiority of neural networks as a forecasting tool.

In particular, the hybrid nature of real estate securities can be exploited for prediction purposes, although supplemented with the aspect of optimizing Risk Adjusted value of total returns from portfolios could be a significant inclusion in the study negated by the authors.

Waggle et al (2006) concentrate on determining the minor effects of alterations; due to non-stationarity or assessment errors in the REIT-stock risk premium and the REIT-stock correlation on the most advantageous portfolio asset mix of REITs, stocks, and bonds. The study also uses historical return data for REITs, stocks, and bonds to generate base level assumptions.

“Monthly and annual total return data for equity REITs, large-company stocks, and long-term government bonds for the 1972 to 2002 period is primarily focused upon.

The marginal effects calculations described begin with assumed values based on the 1988 to 2002 period, the standard deviations of REITs, stocks, and bonds are assumed to be 15.8%, 18.6%, and 11.2%, respectively, The REIT-stock correlation is 0.36 and the REIT-bond correlation is 0.14, while the stock-bond correlation is 0.13. These assumptions have been taken constant throughout the paper.

On the other hand the assumed differences in the returns between REITs and stocks and between stocks and bonds vary through their analysis. In this study the functional decisions are based on the supposition that investors choose the portfolio weights that capitalize on utility U with the common function, given in the paper as:

where, higher values for A equate to higher degrees of risk aversion and vice versa. Levels of A ranging from 1 to 10 are examined. The study goes on to calculate portfolio return for the three asset case with REITS, stocks and bonds, and then the portfolio variance. It assumes two constraints to rule out portfolio short selling and assure portfolio completeness. Further the paper calculates the optimal portfolio weight, and then the calculated marginal effects of change on the portfolio weights are analyzed. The marginal effects due to changes in returns are exaggerated by the variances and covariances of the asset returns and the level of risk aversion of the individual investor, but not by the current returns levels.

The findings signify that the expected return of REITs relative to that of stocks is a much more imperative factor than the REIT-stock correlation in making portfolio decisions. The portfolio impacts due to variation in REIT returns are more evident for aggressive investors and less for more conservative investors. For many investors, the marginal effects calculated in this paper revealed that their actual, as compared to theoretical optimal, allocations would not be affected at all.

Impact of Transport Costs on Housing Decisions

This study will emphasise on the effect of transportation cost towards the decision of housing location. The case study will be held in Bandar Saujana Putra, Selangor. This study will be using the quantitative methods to further study the effect of transportation cost towards the decision of housing location.

  • Background

In the search for lower cost housing, working families often locate far from their place of work and this will resulting in the increasing of their transportation costs and commute times. However, for many such families, the transportation costs exceed their housing costs. According to Bernstein (2001), affordability has never been just about housing cost, it is actually the interaction between housing and transportation cost that provide more meaningful measure of affordability. Hence, choosing a location-efficient neighbourhood near transit, services and jobs, families can reduce monthly household expenses.

This study will emphasise on the model of land use and prices formulated by Von Thunen in 1826, a German economist. The theory concentrates on difference in relative transport costs in different types of agricultural production. According to J. Harvey (1997), he made assumptions that a boundless flat and featureless plain over which natural resources and climate are distributed uniformly and there is a central market for the area.

Furthermore, he also assumed that the farmer used uniform horse and cart transport facilities to this central market, and different foods can be grown, but since these differ in bulk, the cost of transporting them to the market also differs. For each type of product, transport cost varies directly and proportionately with distance from the central market. However, the receipts from cultivation of one hectare of land are the same for all types of product.

Given by these assumptions, it pictures the rent-paying capacity as a function of transport cost and the distance from the market. As distance from the market increases the total costs are raised by the increased cost of transport of the cultivation product. However, this study will relates this theory with the decision of housing location of the case study in Bandar Saujana. It will examine whether the theory match the pattern of the housing location in regards with the transport cost.

Bandar Saujana Putra is a new self-contained township located in Sepang Selangor. The township launched the first phase of the development in 2004, has an easy access to the town centre using ELITE Highway. Its easy access to the town made Bandar Saujana Putra an ideal for the case study as the resident able to travel to the respective location of their needs.

  • Statement of Problems:

The township of Bandar Saujana Putra is located approximately 20km from the centre of Kuala Lumpur and the residents enjoy an easy access via ELITE Highway. However, how the transportation cost is plays a role in determining the decision to reside in Bandar Saujana Putra?

Furthermore, does the Von Thunen theory explain the pattern of location theory in the case of Bandar Saujana Putra?

  • Objectives of Study:

The main objective of the study is to examine the effects of transportation cost towards the decision of housing location.

The second objective of the study is to examine whether Von Thunen theory match the pattern of location theory in Bandar Saujana Putra.

  • Scope of Study:

The study is confined to the areas of Bandar Saujana Putra, Selangor since it is located approximately 20 km away from city centre and easily accessible. The respondent of the questionnaire are limited to the residents of Bandar Saujana Putra and analysis as well as findings from the rental and property price will be used to accomplish the objectives mentioned above.

The difficulty and limitation for the study arise when distributing the sample questionnaire and to get the feedback from the respondents. There will be situation where the respondents that have been approached will not or hesitate to give cooperation to the sample questionnaire.

  • Research Methodology:

The study would be done in an analytic manner. The information that is needed to examine the issue will be obtained from primary and secondary data.

  • Primary Data:

Primary data refers to the first-hand data, which required data collection. For this study, it will mainly involve in the distribution of questionnaire to the residents of Bandar Saujana Putra. The analysis will also be done according to the study areas in order to examine the transport cost of the residents. The question will be in objective manner administered to arrive to the objectives of the study.

  • Secondary Data:

The second method is secondary data which will mostly comprise of data collection through references of such as relevant books, journal, conference paper, newspaper and magazine articles and also online references. The data will also obtain from the economic text book which further explained the theory related to the study.

  • Significant of Study:

It is hoped that the anticipated outcome of this study can benefit the government especially the Town Planners in determining the structure of local city plan. While planning for housing development and also commercial hub, the developer and town planners have to consider the factors of distance and transportation as these two related closely to the affordability factor of a household.

Secondly, this study will also benefit the house buyer in determining the location of the house as the distance and transportation cost is concern. The study will enlighten as how the location factors of property affects the daily budget of a household. The study also points to the importance of infill development that expands the supply of affordable housing in inner city and older suburban neighbourhoods that have good access to traditional job centres; the development of more affordable housing near transportation hubs and suburban employment centres.

Lastly, the study intends to benefit the students as it will open up more discussion regarding the issue. Further research can be done to improve the findings of this study and hopefully it will beneficial towards the knowledge of the students.

  • Organisation of Study:

This study will consist of five chapters where the first chapter provides a brief concept and overview of Von Thunen theory that will be discussed further in the Literature Review. The first chapter consist of the introduction of the study and also statement problem that initiates the study. The first chapter also explained on the limitation faced on doing the study and the significance of this study.

Meanwhile, the second chapter will discuss on literature review related to the study. It will mainly focus on the concept of the dynamic of Von Thunen theory in relation of the property market. The next part of the chapter will look further on the theory of urban economic and the formulation of the theory towards the locational decision. It will further strengthen the understanding of the theory based on the literature reviewed.

Chapter three will discuss further on the methodology used in obtaining the information for the study. The quantitative methods of distributing questionnaire will be discussed further as well as the qualitative research methods used in the study. The qualitative research of collecting, analyzing, and interpreting data is by observing the current market trend. This chapter will further emphasise on the case study chosen which is Bandar Saujana Putra, Selangor.

The fourth chapter of the study will shows the analysis of the data collected previously. Information and data that is obtained from the survey of the market rental will be further detailed in this chapter using the appropriate graphs and diagrams. The analysis of the findings is further discussed in relation to the patterns of economic rent in the market.

The last chapter will conclude the analysis of the findings and draws the recommendation of the further study to compliment this research. It will also determine the confirmation of the objectives of this study as well as the holistic achievement of the study.

Chapter 2: Literature Review

  • Introduction:

This chapter will explain further on the previous literature and writing in regards of the urban land use in general and Von Thunen theory of locational decision. Other than that, this chapter will also discuss on the limitation of the theory as well as the formulation of the theory.

  • Background:

Urban land use comprises two elements; the nature of land use which relates to which activities are taking place, and the level of spatial accumulation which indicates their intensity and concentration. Central areas compared to peripheral area have a high level of spatial accumulation and corresponding land uses such as retail while peripheral areas, on the other hand have lower levels of accumulation. In addition most economic as suggested by Gordon (2005), social or cultural activities imply a multitude of functions, such as production, consumption and distribution.

These functions take place only at specific locations and are part of an activity system. Therefore activities have a spatial imprint whereby some are routine activities as they occur regularly and are thus predictable, such as commuting and shopping. Others are institutional activities that tend to be irregular, and are shaped by lifestyle for example sports and leisure, by special needs for example healthcare. Still others are production activities that are related to manufacturing and distribution, whose linkages may be local, regional or global. In short, the behavioural patterns of individuals, institutions and firms have an imprint on land use and the representation of this imprint requires a typology of land use, which can be formal or functional:

  • Formal land use:

The representations are concerned with qualitative attributes of space such as its form, pattern and aspect and are descriptive in nature.

  • Functional land use:

The representations are concerned with the economic nature of activities such as production, consumption, residence, and transport, and are mainly a socioeconomic description of space.

  • Residential accommodation:

The stock of residential accommodation varies from multi-storey flat near the city centre, through back-to-back terrace houses and then semi-detached, to detached houses often standing in spacious ground. This stock of residential accommodation reflects decisions taken at some time in the past because of the building costs rule out the choice of new construction for a substantial part of the population. If the residence is to compete land away from other uses then sites would have to be developed to higher densities in or near the position of greatest accessibility than elsewhere, because sites in that area provide optimum location for higher order uses such as offices and retailing.

According to Smith (1997), there is a relationship between a person’s income, his place of residence and his place of work, although the correlation is not fixed, for individuals differ in the proportion of their incomes they choose to spend on accommodation. An individual, according to Cunningham (1999), seeking to maximise utility, must weigh his desire for access to his place of work against various possible combinations of commuting costs and accommodation prices and his other desires for urban contacts and amenities.

Incomes will determine how far a household’s residence preference can be indulged. With differing preference consumers in the same group of income may demand different type of accommodation. On the other hand, those desiring contacts furnished by near central locations have the advantage of lower transport cost but frequently have to sacrifice certain site amenities. Where persons of unlike incomes lives at distances where they incur the same commuting costs then the person with the highest income will occupy the best accommodation, and so on.

  • Urban Land Use:

Commercial land use according to Faraday (1997) and supported by Lean (2001) involves relationships with its supplier and customers as it support the claim that land use in both formal and functional representations implies a set of relationships with other land uses. A level of accessibility to both systems of circulation must be present because relationships with suppliers will dominantly be related with movements of freight; relationships with customers would include movements of people. Since each type of land use has its own specific mobility requirements, transportation is one of the factors of activity location and is therefore associated intimately with land use. Within the urban system each activity occupies a suitable, but not necessarily optimal location, from which it derives rent. Transportation and land use interactions mostly consider the retroactive relationships between activities, which are land use related, and accessibility, which is transportation related. These relationships often have been described as a “chicken-and-egg” problem since it is difficult to identify the triggering cause of change; do transportation changes precede land use changes or vice-versa?

Urban transportation aims at supporting transport demands generated by the diversity of urban activities in a diversity of urban contexts. A key for understanding urban entities thus lies in the analysis of patterns and processes of the transport / land use system. This system is highly complex and involves several relationships between the transport system, spatial interactions and land use:

  • Transport system:

It will consider the set of transport infrastructures and modes that are supporting urban movements of passengers and freight. It generally expresses the level of accessibility.

  • Spatial interactions:

It will consider the nature, extent, origins and destinations of the urban movements of passengers and freight. They take into consideration the attributes of the transport system as well as the land use factors that are generating and attracting movements.

  • Land use:

It will consider the level of spatial accumulation of activities and their associated levels of mobility requirements. Land use is commonly linked with demographic and economic attributes.

  • Accessibility:

Accessibility evaluates the net economic costs of moving persons and goods between one place and another place. It is, therefore, not only concerned with the distance to be travelled between two places but, more important, with the time taken to travel that distance, i.e., with all the factor costs in any journey (Lean , 2001). However, accessibility does not affect solely the real costs incurred by movement but also the real benefits derived.

The residential demand for urban land also depends upon accessibility but the capital sum a residential user pays to obtain a site represents a money evaluation of the satisfaction to be derived from that site. According to Goddall (2001) residential demand depends upon utility or satisfaction and the residential user seeks that the site which allows him to maximise his utility. Thus, for the residential user travelling, whether to work, to shops, or for pleasure, represent a disutility and each person wishes to minimise these disutilities such as the time and money costs of travelling.

Disutilities would be minimised if a residential user located himself on a site with a high degree of accessibility, so residential use would compete with business uses for accessible site. However, for a residential there are certain amenities considerations involved in the choice of site which confer satisfaction/utility upon the user. The amenity value of a site depends upon factors not readily assessable in financial terms such as space, quiet, fresh air, etc. According to Wardour (1997) the choice of a residential site is, in many cases, a compromise because the desire to minimise travelling disutilities demands a relatively accessible, therefore central site, whereas the quest for amenity leads towards less accessible sites some way from the city centre. Greater amenity can usually be achieved by accepting additional travelling disutility.

  • Urban Land Use Model: Von Thunen Ring Model:

The relationships between transportation and land use are rich in theoretical representations that have contributed much too geographical sciences. Several descriptive and analytical models of urban land use have been developed over time, with increased levels of complexity where all of them involve some consideration of transport in the explanations of urban land use structures according to Carter (1995). However, this study will emphasise on the oldest land use theory by Johann Heinrich Von Thunen. According to Rodrigue (2000) modern location economics began with Von Thunen (1826). Being the first to develop a basic analytical model of the relationships between markets, production, and distance he too looked upon the agricultural landscape as the purpose in this study. The relative costs of transporting different agricultural commodities to the central market determined the agricultural land use around a city. The most productive activities will thus compete for the closest land to the market and less productive activities will be located further away. The model has a set of basic assumptions which reflects agricultural conditions around a city in the early 19th century:

  • Isolation:

There is one isolated market in an isolated state having no interactions (trade) with the outside.

  • Ubiquitous land characteristics:

The land surrounding the market is entirely flat and its fertility uniform.

  • Transportation:

It is assumed there are no transport infrastructures such as roads or rivers and that farmers are transporting their production to the market using horses and carts. Transportation costs are dependent of the type of commodity being transported to the market as well as the distance involved.

Comparison of the relationships between production cost, the market price and the transport cost of an agricultural commodity is explained thoroughly as follows:

R = Y(p-c) – Yfm

        • R = Rent per unit of land.
        • Y = Yield per unit of land.
        • p = market price per unit of yield.
        • c = Average production costs per unit of yield.
        • m = Distance from market (in kilometers or miles).
        • f = Freight rate per unit of yield and unit of distance.

                     Carter (1995) further explained that all agricultural land uses are maximizing their productivity (rent) whereby in this case it is dependent upon their location from the market (Central City). Discourse community of farmer play significant role as they are to maximize his profit which is simply the market price minus the transport and production costs. The most productive activities such as gardening or milk production or activities which cost higher in transportation (firewood) are located near to the market. The above figure provides an overview of Von Thunen’s agricultural land use model with the basic assumptions being applied such as isolation, ubiquity, and transportation. It can be divided into two parts:

      • The pure isolated state over an isotropic plain (left). In this case, the model takes a shape of perfect concentric circles.
      • The potential impacts of modified transport costs (a navigable river) and the presence of a competing center (right).

      The relationships between agricultural land use and market distance are very difficult to establish in the contemporary context.

      Von Thunen primary objective was to determine the relationship between the intensities and type of agricultural production and the available markets. The physical and cultural complexities however, led him to disregard the variations in a large number of environmental and social conditions. Instead, he made seven basic assumptions, which formed the core of the theory. The ideal site consisted of completely rational (optimising) economic behaviour, an isolated state, a single central city, settlement in village far away from the city centre, and a racially homogeneous population, uniform topography, uniform climate and soil fertility, and a relatively uniform and primitive transportation cost according to Griffin (1968) and later supported by Rodrigue (2001).

      Sinclair (1966) however noted that Von Thunen primary concern was to discover and examine the laws which governed the pattern of agricultural land use existing in his time and within his experience. His dominant recognition was the land use pattern depended upon competition between various types of agriculture for the use of particular piece of land. The controlling factor in this competition was Economic Rent as defined here the return of investment in the land. Later it is sopported briefly by Rodrigue (2001) that form of land providing the greatest Economic Rent would make the highest bid for the land and displaced all others.

      The facts that transport cost increased with distance and they imparted a spatial variation to Economic Rent become an eye opener to Von Thunen whom later comes to realise that transportation costs were a primary factors determining Economic Rent. Hence, Economic Rent from any one land use can be expressed as a function of a distance from the market.

      • Limitation of the Theory:

      In constructing the model complicating factors were assumed away, providing a laboratory in which the interplay between a small number of essential causal influences and their relations with certain effect could be studied. In particular this model provided a mechanism in which changing technical and economic inputs could be linked with evolving geographical patterns of production according to Samuelson (1983) and Linehan (2003).

      The attraction was thus, that the theory simplified the world by concentrating on the effects of one primary variable, transportation costs, on the location of agricultural production. Von Thunen himself accomplished this by creating the idea of the economic margin. In his view, land use areas were bounded by margins where one use became more cost-effective than another. Given von Thunen’s thesis, Peet, (1987) could attempt to explain how these factors may have changed historically and explain changes in the location of production. The uses of Von Thunen model, or derivatives of it, continue to this day among quantitative geographers for example, Wang and Guldmann (1997); Hill and Smith (1994); Linehan (2003).

      Even in 1966, however, the limitations of the model were accepted. Gaston (1997) followed by Linehan (2003) for instance admits “Von Thunen’s analysis is basically descriptive rather than normative” and does not explain changes over time or the possible effects of economies of scale. Despite this, Smith (2000) promotes the model because it made marginal economics geographical. In the years since these limitations in particular the fact that Von Thunen ignored changes over time have often been mentioned, but the model survives in importance in the minds of geographers and is a main subject of beginning economic geography courses. The most likely reason for this is that Von Thunen rings actually appear to exist in many cases. For instance, cities are often surrounded by a dairy ring. Von Thunen rings are one of the few very easily understandable models in geography that truly appear to explain a pattern in the world, even if the model is primarily descriptive and does not give much idea about how exactly this pattern came to be or what might happen to it in the future. Harvey made this argument in Social Justice and the City (1997), arguing that social scientists are attracted to models such as the Isolated State because they appear to be empirically relevant.

      Barnes (1998), following Haraway (1997). Latour (1987) and Linehan (2003), comments on the manner in which von Thunen’s model, in particular the concentric zone diagram showing agricultural land use rings of decreasing intensity with distance from the city, has been “fetishized” within economic geography. Barnes (1998) argues, based on the work of Barnbrock (1997) and Harvey (1997) that Von Thunen’s concept of the frontier wage, the “just reward” for work done that, if paid, would ensure worker harmony, leads to a more complete understanding of Von Thunen’s work. This sense of harmony was also Von Thunen’s vision of the isolated state in general, “constructed not just an isolated state, but an ideal one”.

      The rings were “less a description of how the world is, but how it should be once social harmony was realized”. The idea that the isolated state was not just descriptive but also prescriptive is emphasized by Barnbrock (1997), who writes that for von Thunen “the Isolated State is the ‘true’ representation of the final end mankind should strive for.” He further quotes von Thunen, who states “in the Isolated State … we have in mind only the final goal”. Harvey points out, however, that this was an essentially conservative goal. Through the imposition of the frontier wage and a more harmonious land use pattern, “class conflict and social polarization” would be minimized within German society. The lesson learned by neo-classical economists, Harvey argues, was that “economic science could seek and spell out principles of social harmony without appeal to the political economy of the spatial fix”.

      The use of Von Thunen’s ideas within geography highlights the conflicts within a discipline that strives both to find regularity in the world and to explain the patterns seen in specific places. The Isolated State theory is attractive because it one of the few easily understood location theories for which empirical examples can be easily drawn. Of course, these examples are never absolutely correct and often seem overly simplistic. Barnes’ (1998) analysis of Von Thunen and the social construction of Von Thunen’s theory within economic geography particularly help understand the use of Von Thunen within agricultural economics supported by Watson (2005). The idea that Von Thunen’s theories were not just descriptive but also prescriptive more closely parallels the attitudes of the agricultural economists, who were searching not just to describe land use but often also to restrict it in order to build a more harmonious dairy economy.

      • Formulation of the Theory towards Locational Decision:

      In an attempt to test the hypothesis that market forces largely allocate the supply of sites among the alternatives uses within the urban area, Von Thunen’s agriculture land use model is adapted. The rising transportation costs explain the differentials rent among homogenous site as stated in the theory explained by Moss (2001). Understood the accessibility within an urban market will be at maximum at the city centre; the assumptions of a competitive market and a homogenous site will be given. As far as transport and commuting cost is concern the accessibility tend to decrease when distance from the market centre increases.

      Moss (2001) concluded that firms and households have no intentions to change location and ceteris paribus because profits and other objectives are maximised. Next output is optimal and the maximum efficiency of the city as a productive unit is realised. In fact, the resulting structure of land uses reflect institutional arrangement such as zoning ordinance, transportation system and policies of financial institutional as well as the competitive ranking of the city, i.e. its economic base. The location of firms and households within this structure depends heavily upon competitive bidding for specific sites since rent differentials result market forces require from each site that rent resulting from maximum utilisation or highest and best use. Maximum economic rent occurs at the market centre because the supply of sites and average transportation and commuting costs for the local market are least according to Seyfried (1963).

                     Seyfried (1963), followed by Linehan (2003) also suggested that the wages and interest are among production costs and they are assumed to be independent of location, but transportation costs rise as distance increases which later cause the rent, the surplus of gross revenue over production costs, decline proportionately. The supply of sites, i.e., more and larger land unit, increases with the distance from centre. Therefore competing user of sites will locate relative to their economic rent potential so that a structure of site values relative to location results from market forces. This structure of urban land market can be visualised as a rent or value surface; the market centre is the apex which is the point or area of highest site value. In the other word, rent decline with distance so do the value and land uses too change. If sites of equal value are related, the iso-value lines or contours are a function of site rent or value. Thus the spatial structure of land uses or the urban land market at a moment of time can be shown by the rent or value function or gradient.

      • Conclusion:

                     The chapter on literature has discussed the concept of urban land use, the linkage between urban land use and the Von Thune theory, limitation on the theory as well as formulation of Von Thunen theory. The following chapter will discuss on the methodology of the study used in gathering all the information needed.

      CHAPTER 3:

      RESEARCH METHODOLOGY:

      • Introduction:

      This chapter discusses in details the research methodology, which ensured that the objectives of the study can be achieved in a proper way. An appropriate research methodology application may avoid deviation against the objectives and gives clearer understanding on how the study is to be carried out. Validity of the research data and reliability of measurement will affect the practical research and accuracy of the result. Thus, the research methodology is directly connected to objective and problem statement of research.

      The second part of this chapter will go into details of the case study of Bandar Saujana Putra, Selangor. According to Yin (2003) a case study design should be considered when:

          1. the focus of the study is to answer “how” and “why” questions;
          2. you cannot manipulate the behaviour of those involved in the study;
          3. you want to cover contextual conditions because you believe they are relevant to the phenomenon under study; or
          4. the boundaries are not clear between the phenomenon and context.
          • Research Design:

          Research design can be classified into exploratory research and conclusive research. Exploratory research design is mostly in qualitative nature while conclusive research design is in quantitative nature. It is more focus on the collecting data from primary or secondary data. It also involves in many qualitative data collection techniques such as focus groups and depth interview (Shukla, 2008). Qualitative data collection will provide a lot of information, however it also hard to interpret from the data collection. Meanwhile, qualitative case study is an approach to research that facilitates exploration of a phenomenon within its context using a variety of

Analysing Existing Trends of Space Selling

Abstract

If an ad is created and placed in the media, the costs of creation and time or space in the media must be paid for. This is a major area in which advertising departs from public relations. Advertising doesn’t have that problem. If time or space is bought in the media, the ads (as long as they follow the guidelines set down for good taste, legal products and services, etc.) will appear. The drawback is that ads are clearly designed to extol the virtues of products and companies, and any ad is perceived by consumers as at least partly puffery. There are two basic ways to sell anything: personally and non-personally. Personal selling requires the seller and the buyer to get together. There are advantages and disadvantages to this. The first advantage is time: the seller has time to discuss in detail everything about the product. The buyer has time to ask questions, get answers, and examine evidence for or against purchase. A second advantage of personal selling is that the seller can see them. Finally, the seller can easily locate potential buyers. If they enter a store, they probably have an interest in something that store sells. Street vendors and door-to-door sellers can simply shout at possibilities, like the Hyde Park vendors who call out. From there on they fit their message to the individual customer, taking all the time a customer is willing to give them. From the above, it appears that personal selling is much better than advertising, which is non-personal. This is true. Advertising has none of the advantages of personal selling: there is very little time in which to present the sales message, there is no way to know just who the customer is or how she is responding to the message, the message cannot be changed in mid-course to suit the customer’s reactions.

Products, services or ideas are the things that advertisers want consumers to buy (in the case of ideas, “buy” means accept or agree with as well as lay out hard, cold cash). However, there is more involved in products or services than simply items for purchase.

A product is not merely its function. It is actually a bundle of values, what the product means to the consumer. That bundle may contain the product’s function, but also the social, psychological, economic or whatever other values are important to the consumer.

 

Chapter 1: Introduction

In an era when physical tail space is still at a premium, constrained by planning restrictions and rising costs, productive use of space is a key indicator of buying and merchandising success, and high space productivity depends on offering the right range, in a logical layout, with products available and easy for the customer to find. Decisions about how much space to devote to each product line and its location in the store play an important role in the pursuit of merchandising success. The aim of this chapter is to provide an insight into this process.

1.1 Space selling management:

Space selling constraint applies to all retailers, but in non-store retailing the constraints are different. A mail order retailer, for example, has page space and the number of pages in a publication as constraining factors, whilst a TV shopping channel needs to break down the airtime to different products. However, internet retailing offers great opportunities for adding space without much additional resource input. The main constraint on the amount of space used in a virtual outlet is the customer’s attention span. In spite of this additional freedom, the objectives of space allocation are essentially the same no matter which retail format is used.

The management of retail space is concerned with a number of key objectives. The first is to optimize both short-term and long term returns on the investment cost of retail pace. The second is to provide a logical, convenient and inspiring interface between the product range and the customer. This can be particularly important in a large store, where customers can quite easily become overwhelmed and lost. Another objective is to make sure that the right selection of products is available; that products fit into the retail space and that stock-outs are avoided. Choice for the customer is maximized when the best selection for them is put into the available space. Space allocation aim has an important role to play in communicating the retail brand, When ice is managed centrally it helps a chain of retail outlets to achieve visual consistency, so that customers arc reassured by the similarity of the store layout and shelf appearance.

1.2 The Space Management Process:

A retailer goes through a number of stages when allocating space to products. These four stages will they used as a framework for the Inclusion of discussion topics within this chapter.

Measuring Space Selling:

Although space in a store outlet is three dimensional, retail space is often measured in square, rather than cubic units, Square units arc appropriate where, for example in fashion retailing, a variety of single tier fixtures stand on the shop Iloor (see FigureS. I). Many fixtures, however, arc multilevel and so more appropriate ways of measuring space to allocate might be on the basis of linear or cubic footage (see Figures 8.2 and 8.3). Measurements of space that are more specific to individual retailers might be useful, such as the number of pages to be published in a catalogue or the total number of fixtures available in an outlet.

Space Productivity:

The two principal measures of retail success arc sales and profits. Sales volume and profitability can also he measured in relation to the amount of space used to generate those levels of sales and profits. This can then be compared with the level of financial investment in that space. The resulting measures express the productivity of retail space. Sales (or profits) per square meter is a commonly used measure of retail space productivity, which is an important concept in the evaluation of retail product management performance.

Dividing the space into selling areas:

At this stage, space management is concerned with allocating space to different product areas, defined according to individual retail businesses, but usually on the basis of product (department or category. The amount of space will he determined to a greater extent on previous performance indicators, typically sales values. However, sonic products, because of their physical characteristics may need disproportionate amounts of space in relation to sales. In a department store, home furnishings may need a relatively large amount of space to generate a good level of sales because the products are bulky, a large variety of merchandise is needed for customers to choose from and a lot of display space is needed to do the product justice. On the other hand, jewellery is a high value product category that needs relatively small amounts of space for display and selling purposes. The stage a product category is at in its life cycle is likely to influence the space allocation at this level. If a category is growing, then more space should be allocated, whereas a declining category needs to have its space rationalizes.

Measuring selling space using square metres

Using linear measurement for space selling

Using cubic measurement for space selling

Typical €˜hotspots’ In a Space selling

Particularly evident in department stores, where specialist products such as furniture and home entertainment, as well as hairdressing salons and customer service department’s  located on basement or upper floors, Customer flow can also be encouraged by locating high demand items throughout the store layout, with plenty of impulse items located in between. Retailers need to find a balance between maximizing sales of high demand products, generating flow around slower selling products (which may have higher profit margins), and providing logic and convenience in the layout for the customer,

Product adjacencies:

A logical route through the different product categories or departments is part of a customer focused offer, and can encourage linked sales. For example, in a baby equipment retailer like Mother cares it makes sense for merchandise to be grouped into themes for space planning purposes. These product themes are then presented in a logical way to the customer as they move through the store. Products for immediate needs, such as feeding and general baby care come first, followed by bath time and clothes; and then on to the more expensive, one purchases in the travel and nursery departments.

The barbecue season provides a good opportunity for retailers to generate interest and sell distinctive groups of complementary products. Some of these products are strictly seasonal: the barbecues themselves and the briquettes for example. However, other products can be given additional space allocations in the seasonal aisle as part of the €˜barbecue category’. Firelighters, matches, marinades, sauces, disposable tableware and beer are products that are found around the supermarket throughout the year, but are given a boost In the barbecue season by being merchandised as complementary goods.

It is estimated that guests take an average equivalent of eight drinks when they are Invited to a barbecue, and €˜studies (bulk packed small bottles of beer) are particularly popular for barbecues as they are easy to handle, €˜women friendly’, and easily chilled. Whilst the majority of barbecue beer is bulk purchased In advance from supermarkets, and then chilled down at home, convenience store retailers are often used for guests to buy drinks en route, and so providing chilled beer becomes important for this type of retail format.

Allocation space to individual product:

Having made a plan for the layout of departments or categories within the retail outlet, the next stage is to make a decision about exactly how individual product lines should be displayed within the outlet, whether the product is going to sit on a fixture, or be represented by a photograph within a page spread. Various approaches to space allocation are discussed, for example by using sales or profits as a guideline, some practical challenges arc considered, and the relationship between category management and space allocation is explored in this section.

Allocating space on the basis of sale:

The guiding principle here is the more a product sells, the more space it should be given. Retaining a high stock service level will depend on retailers ensuring that they devote enough space to a high demand product, such as milk, to prevent replenishment of that item becoming inefficient and inconvenient to the customer. A fast selling item however may not be one that a retailer makes much profit on (again milk is a good example), and so they may decide to allocate more space to their profitable lines. In taking this approach, however, the retailer is likely to encounter the problem of not devoting enough space to fast moving lines, so a balance has to be achieved. Another decision that has to be made is which €˜sales’ figure should he used for the allocation exercise, Alternatives are historical sales figures (for that outlet); market share figures; or projected sales figures.

Store A is a branch of clothing retailer XYZ in a medium sized town centre. Ten miles away there Is a regional shopping centre where branch B Is located and twelve miles In the opposite direction, branch store C Is located In the heart of a city centre shopping complex. The policy of retailer XYZ is to offer a returns policy In all of its stores for products bought in any outlet nationwide (including those purchased from its web site). Shoppers from the town where store A is located, often take shopping trips to the neighboring centres, where B and C are located, especially if they are wanting to make a major purchase such as a coat or a suit, and require a wide choice of retail stores to select from. Unfortunately for store A, any unwanted products usually end up being returned to the customer’s local store. This has the effect of distorting the sales figures for store A, upon which space allocation decisions are made. Unfortunately, the retailer’s information system does not recognize the difference between a returned garment from the original store and one returned from a different outlet. In order to counteract this problem, which can be quite widespread, a retailer would need to allocate space on the basis of estimated sales rather than historical sales.

Space elasticity:

Allocating space according to a measure of sales assumes that there a relationship between the amount of space and the rate of sales, this relationship is termed the space elasticity of a product and it refers to the extent to which the sales of a product will change in response to a changed. In the amount of space allocated to that product Research suggests that space elasticity not uniform amongst products, or across stores or departmental locations.

Using profit measures as a basis for space allocation ill prevent a business manager from allocating large amounts of best quality retail space to unprofitable products. They could mean, however, that a retailer was allocating unnecessarily large amounts of space to products that would sell as well with a smaller space. Profitable lines may not in fact sell very quickly at all, and allocating extra facings or shelves of the product may have very little impact on the sales of the product. In this case the quality of the space becomes important, so the retailer can locate high profit items in locations around the stare that arc better selling. The relationship between the sales and generated by different products, and suggests how space and ranging decisions should be made accordingly. Allocating space according to sales, and in particular, product profitability, is working with the interests of the retailer, and not the customer in mind and therefore may suggest an illogical and presentation of products. Long term profitability depends on customer loyalty, which is dependent (among many other things) upon being satisfied with the presentation and assortment of products. Fine tuning the allocation of space within a retail outlet therefore requires extensive amounts of high quality data, together with a pragmatic and customer orientated managerial approach at store level.

Productivity and efficiency and towards are visual display improvements. Once an optimum level of efficiency is achieved, space planners can move onto the objective of making their products and fixtures more attractive than their competitors. Some of the latest planning systems are able to simulate the entire store environment, so that the product manager can view an attractive plan in virtual reality and make any adjustments they fed are necessary. Recent space optimization technology applications offer the opportunity to create specific platform.

Space Allocation and Category Management:

Although the performance of individual product lines is Important to retailers in terms of the rate of sales which influences availability and the levels of contribution to turnover and profitability, the focus of performance In many’ retail organizations is at product category, rather than individual SKU level. A retailer is more interested in overall levels of sales and profits generated by their product range, rather than the sales of a single line that might be of interest to its manufacturer. The product category has emerged as a manageable classification for most aspects of product management, and certainly applies in the case of space management. In fact, many would argue that space planning and allocation and the systems that drive the process can only be properly implemented in tandem with a category management approach.

Category management seeks to optimize the depth and variety of a product assortment within a specified amount of retail space and to generate maximum profitability by seeking efficiency in the operations that support the depth and variety. This includes replenishing to guarantee availability’ and adding new products and running promotions to generate customer interest and increase short term sales of particular products, without harming the overall profitability of the category. Space allocation systems allow (Inc tuning of a category assortment, provide the means by which product and category performance can be monitored and analyzed. and by using the programme output the plans can he easily communicated and successfully implemented within the various retail out lets. In some categories key brands are dominant, in which case their presence needs to have immediate impact within the space allocation plan. Other categories are very competitive, in which case low price, budget own brand and promotional products strongly on the promotional. Many businesses use the principle that shoppers will a category from bottom to top, and left to right, and so well-known brands arc placed on middle and lower shelves on the left of the category space in order to provide strong cues to the customer. Premium products meanwhile are placed on high level shelves, selecting their high quality positioning, and the fact that the customer for premium products will seek out the better quality product within the category. In some categories the customer decision-making processes are quite unique and nerd to he fully reflected within space allocation plans. For example, the decision sequence for wine is generally as follows:

Colour —— Country of origin ——– Price Level ——- Brand

Whereas the decision sequence for yoghurt might be:

Natural or flavored ——— type (low fat, standard or luxury) —- Price Level —– Brand Name

These decision processes should determine how products arc displayed within the category space.

In certain modes, if the product is maintained in the offer, long-term customer satisfaction will be retained In spite of the Individual poor product performance. Therefore it is the store’s personality traits that determine the core product ranges, and not the size; the size of the outlet determines the width and depth of the selling type that would appeal to the local customers, Stores are empowered with the merchandise that allows them to drive local market opportunities and local suppliers can also be involved in the process of providing tailored products for individual store needs, As retailers offer more formats from which customers may choose to shop, format preferences and product preferences can be matched, For example, Tesco found that its online shoppers tended to from more affluent backgrounds, and so the on-line product offer is tailored accordingly, with a large range of wines and few value lines,

For many small retailers the cost of a computerized space planning is prohibitive, and so many rely on basic sales and profit margin analysis combined with trial and error in space allocation decision making.

1.3 Summary:

A great deal of space selling is carried out in order to achieve relatively short-term retail objectives, such as maximizing the benefits of a product or departmental promotion, meeting seasonal sales figures, or improving branch profitability. However, the long term strategic objectives of the retailer provide the framework within which these decisions are taken. Space allocations must be in line with the overall positioning strategy of the retailer; the variety and depth of assortment and the stock availability service level should not be compromised by the need for short-term productivity gains. In addition, the arrangement of products around the store needs to be considered in the light of the contribution that product items, brands and categories make to the positioning statement, it may be necessary to over-represent new products or to allocate extra space to growing or seasonal categories in order to reinforce an innovative product positioning strategy. The local customer profile may also lead to exceptional space allocations in an effort to meet individuals’ requirements more closely. However, the retailer’s space is the extent of its empire, and every inch of that space must be used to its maximum effect even if, as we shall see in the next two chapters, some space is designed to he devoid of products. The measurement of that effect, however, must be appropriate in terms of the overall aims for that space.

Chapter 2: Literature Review

Space Selling:

Space selling refers to space available for advertising in different media. The advertising media available are print, electronic & outdoor. The space available and intend for advertising in different media. Decision about how much space to devote to each product line and its location plays an important role in the pursuit of merchandising success. The aim of this thesis is to have an insight into this process. First will have to understand that the services of every publication/channel, costs of space selling. The ads featured in it. And a space seller to sell that advertising space/time to potential advertisers.

2.1 UCPL acquires marketing and space-selling rights for Lemon TV and Jhankar TV:

K Sera Sera’s recently launched free-to-air channels — music channel Lemon TV, and Hindi movie channel Jhankar TV — have appointed Universal Communication Pvt. Ltd (UCPL) for their marketing and space-selling rights. UCPL is a player in the space of airtime selling and marketing of serials, television programmes and feature films for various television networks in India. Jhankar TV will particularly target the Hindi speaking audience. This is a channel that would reach to the audience of cable and satellite in UP, Bihar, MP and Rajasthan. On the other hand, for Lemon TV, they are planning to have different kinds of event and programmes like Lemon party. This will bring in more interactivity too with the relevant TG.’ When asked about the marketing challenges for these new channels, ‘Every new channel in India right now faces the challenges of clutter and telling the advertiser what difference does this channel bring to the table, and what is the value addition. These channels are also in the same situation and we are confident about overcoming these challenges.’ UCPL is associated with media and advertising agencies like Mindshare, Mediaedge:cia, Madison, McCann Erickson, Lintas, etc., and with clients like Hindustan Unilever, Procter & Gamble, and Godrej, among others. As a company, UCPL has now diversified into full-fledged events and brand promotions, striving to create and mange innovative concepts, thus offering their client complete 360-degree solutions.’

2.2 Using the blogging concept to sell wikis:

If a person understands what a blog is, the wiki may be compared and contrasted to a blog. A blog enables a single person to get a message out. A wiki enables a group of persons to assemble a body of knowledge. A wiki can be presented as a blog with one major post (the purpose, topic, idea of the wiki) that others can build knowledge around, without the initiating post getting buried in archives as new posts arrive and are displayed in reverse chronological order.

A wiki may be sold as a horizontal blog platform. Blogs are vertical, recent updates on top, all others shoved down into oblivion, with only tags, categorical sidebar listings, or site search to dredge them up again. But a wiki distributes all the information in a more horizontal, flat, single surface that stretches through pages spread out, not sedimented. The wiki may be sold as a web site set up for idea construction; it is team-architected rather than single-authored. Blogs tend to be univocal and identifiable; one known person expounding a position, with audience members invited to comment on the sermonizing, but not really authorized to begin their own topic threads. Wikis are multimodal and transiently anonymous, many unknown people working together. A wiki, thus is like a super-democratized blog. A blog where the walls between bloggers are audience is dissolved. The audience members become the contributing authors and the originating authors become the audience, and vice versa.

2.3 Modern Trends in Working Styles:

Another interesting way of presenting wikis has to do with the fact that they allow for easy remote working. One of the main advantages a wiki provides is the fact that it is available from any internet-connected web browser, at any time. Information can be worked on efficiently in an asynchronous manner. In this regard, wikis solve tricky coordination problems.

What’s more, a wiki provides a virtual space where all relevant business information can be stored. Hence people working from different places, at different times of the day can still end up with a coherent document. A wiki is more efficient than e-mail for the resulting document can almost be exploited immediately and its last version is “always on top” (which is quite useful when working with more then one person).

2.4 The Advantages of Asynchronous Communication:

Wiki content growth and increasing value in an organization by facilitating asynchronous communication which is often more convenient than other forms of collaboration that require “face time” or “same time”. On the other extreme, making large batches of content (Power Point, White Papers) are inefficient simply because they require the author to provide context and content, some of which may be error laden or out-of-date. Wikis allow smaller batches of contribution to appear at any time, thus relieving two bottlenecks to collaboration. Add to this the fact that they are completely auditable for contribution, and the need for creating “credit” concurrently is removed.

2.5 ROI on social software:

Being able to make a business case will be very important to all convince for every enterprises and after than to make a start on adopting social software. Charlene Li has a contribution about ROI on blogging. But Return on investment has to be calculated for all sorts of social software.

Then again, ROI is becoming increasingly irrelevant when online collaboration tools and social media platforms are available for free, or at extremely low cost. Many companies find they can get along just fine with the free versions of blogs (lBlogger), podcasting (Odeo), video uploading and player embeds (YouTube), and wikis (Socialtext).

ROT (return on time) is the far more challenging aspect of social software. It takes a significant investment in time to become known in the blogosphere, for example. Bloggers must spend large amounts of time in researching topics, writing posts, linking to other Blogs, interacting with comment posters, reading other Blogs, posting comments at other Blogs, producing multimedia content, emailing other bloggers, and adding features and functionalities to a blog. All this in addition to remaining informed about ones industry or field of study.

Warning top management about falling behind in competitive technology should be sufficient to begin a case for online collaboration tools. Explaining that the trends are massively aligned, user-generated content, customer co-creation of product, corporate contributions to innovation, and universal content utopia, advocates of social software and user media can point to great examples of Peer Pioneers companies leading the way: P&G, IBM/Linux, Second Life, Digg, Jigsaw, YouTube, and InnoCentive.

2.6 Successful Strategies for Selling Ad Space on Low-Traffic Websites:

Upon first thinking about it, the idea of selling advertising on a website or blog with limited traffic seems a bit daft. After all, aren’t most advertisers interested in putting their product in front of the highest number of eyeballs possible? Approaching them with piddly visitor numbers seems like a surefire way to end up in the deleted folder.

But though it may feel like putting the cart before the horse, there are many good reasons and ways to sell ad space on low-traffic websites. What you need to always keep in mind is that, while advertisers are drawn to high traffic numbers, they desire something else even more: high conversion rates. There are plenty of success stories of websites that have limited traffic but sell a ton of advertising. These websites succeed because they do one thing well: they deliver the right type of customer to the right type of business.

Space selling concept:

* Take a close look at your website – Whether they sell landscape or skyscraper ads, text ads, video or any other format, they have to offer something of value before you can start to sell advertising space. They know this sound obvious, but it always surprises them how many publishers and online media owners come up with a niche product that nobody wants to buy advertising space in! If they are going to make a fortune in selling subscriptions or other membership related offerings, then fine – but in most cases, forget about their hobby or leisure interest, unless it is unique and offers a great angle. Do make sure their product is going to be attractive to a large enough audience before they attempt to sell advertising – and if they have a fair bit of competition, make sure that they have some unique selling points and formats. As they move into Web 2.0 the requirements from a lot of advertisers will change. If they can offer a new format or idea and take the hard work out of it for the advertiser, they are onto a winner. If they don’t, they’ll lose out to their rivals.

* Choosing ad formats that will sell – Not all ad formats sell well on ALL websites. Put another way, some ads work better on consumer websites than they do on business sites – and visa versa. The trick is to test their ads with different messages, fonts, colours and designs. This research will be well worth it in the end and can make the difference between making a decent revenue stream and making a substantial one. One of the biggest things to bear in mind is where the advertising should be placed. If they sell products on their site, there is very little point displaying adverts, which could detract potential customers away from their own sales message. So, the first thing they need to do is highlight the sections and pages where they are happy to accept advertising. When they have done that, they can then take a look at design and placement. Always think of the customer when you think about designs, placements and tracking. Make it simple for advertisers to find and relate to the formats, as they will have to justify the ad spend to their bosses.

* Reporting and statistics – This is a vital part of their business! Remember, communication is the key to long-term success. If they don’t have a good reporting and stats package in place, then they will find it difficult to show their customers what they are/could be getting from their services. This can take a bit of time to set up, but it really is worth the time and money they put into it. Once in place, it can be automated to match their business model and to provide an essential package for their existing and potential customers. Remember out of sight, out of mind – leave it to their competitors to make this mistake!

* What are their competitors doing well? – Even if they are offering a good service, they bet there is something they can learn from their competition. Some media companies do have the luxury of having someone w

Real Estate and Portfolio Investment

Real Estate Investment business deals with immovable property, such as land, and everything else that is permanently attached to it, such as buildings. C.F. Sirmans et.al. 2003, in his paper observed that there has been a lot of efforts by researchers and academicians in studying and attempting to model the benefits of establishing diversification strategies for portfolio investments. All previous works concentrated on combination of different stocks into a single portfolio. With the passage of time research has been extended into analyzing individual factors (like bonds, currencies, real estate, international stocks); recently researchers did make some new in-roads in the potential benefits of real estate investment strategies.

In the same article the same authors cited the work of other researchers who have worked on Modern Portfolio Theory (MPT; see Markowitz, 1959), who have attempted to model the benefits of establishing diversification strategies for portfolio investments. Initial work only focused on potential gains from combining different stocks into a single portfolio. But research has been extended into bonds, currencies, real estate, international stocks and bonds.

According to Henderson Investors (2000), next frontier for the individual investor would be international real estate. Although microeconomic theory of consumer choice and decision-making under uncertainty is highly developed and finds much empirical support from stock market data, data providing similar evidence for direct, private investment in real property have not been easy to obtain. Accordingly, research in this area is scarce. Yet, many private investors prefer building a portfolio of real property investment, since it is believed that it offers a higher risk adjusted return than financial assets. The aim of the current research is to address the risk associated in real estate shared investment.

1.2 Background

Over the years, many tools, processes and regulations have been created to give investors assurances that investment managers are weighing risks and evaluating potential returns in a fashion that is acceptable to investors. A large proportion of these mechanisms involve government regulation which

defines and enforces rules for regulated financial firms. Commercial banks, thrifts, broker-dealer firms, mutual fund companies, and insurance companies each have their own regulatory bodies and rules. Internally, these firms maintain staff to monitor and assure that the rules are obeyed.

Risk managers are charged with understanding, monitoring and controlling the new world of financial complexity. The definition of risk management has two separate parts. The first part defines it organizationally and the second part defines it functionally. Through widespread research on real estate investment trends, the risks associated with investing and the long term returns have been studied extensively (Springer, et al, 2005). It is essential that a potential investor has a thorough knowledge of “how to manage” the potential risks associated with an investment in real estate when analyzing the benefits of the potential investment. The specific risk factor variables can be tuned to suit the requirements and the particular real estate climate of the particular investment. The management of risks includes analysis of portfolio diversification, property age, specific demographics of the property locality, portfolio size and others.

Risks in real estate projects must be considered and should never be underestimated, because those tend to affect the whole project management processes, in terms of project programme delay, project cost overrun etc.

However, there is also a potential risk management technique, which can potentially affect the profitability of an investment: risk sharing. While the other risk management techniques focus on a single investing individual acquiring real estate, a group of partner investors may also choose to acquire real estate, with each having an interest in their investment. This concept of risk sharing changes the scenario as the burden of overall risk is split into the respective investment of each partner. Furthermore, this concept is different from the other concepts, especially if the dynamic nature of the real estate business is adapted in the modeling process because of the advantage of the shared contribution in the investment by various investing partners.

When a person acquires real estate, she/he also acquires a set of rights, including possession, control and transfer rights. Investment in real estate involves the commitment of funds to property with an aim to generate income through rental or lease and to achieve capital appreciation. However, the real estate income can be highly unpredictable and consequently investment in real estate is very risky as it is the case with investment in equity. One of the main reasons for the collapse of even the largest financial institutions, in the recent times, leading to the recession of major economies of the world is due to the collapse of the real estate business. This global crisis could have been prevented if the potential risk factors leading up to it had been identified at an early stage. But the risk assessment associated with this strategic investment was not properly followed. Thus, in order to be able to increase chances of investments in real estate returning profitable margins, it is critical that risk factors are identified and a proper investment strategy put into place.

Since real estate business involves immense risk owing to the requirement of mammoth funds devotion, the long operation period and the volatile markets, Brown (2004) attempts to explain as to why a potential investor would still consider investing in private real estate properties within a portfolio as opposed to conventional methods such as through the vehicles of REITs and stocks. He investigates the possible reasons for the private investor, especially in Tier II Properties (generally being apartment buildings between 4 – 100 dwelling units) as opposed to an investing institution or a pension fund. He concludes that (a) the private real estate market for “Tier II Properties” is inefficient and that (b) applying portfolio theory to individual parcels of real estate is, at best, a challenging task. At the practical level, high down payments, high transaction costs and lack of liquidity usually place forming a portfolio of private real estate assets out of the individual’s reach. On theoretical grounds, forming efficient set portfolios implies perfect liquidity, perfect divisibility and perfect reversibility. Even if the first two of these requirements are somehow met, the construction of a short sale of an individual parcel of real estate is impossible. Thus, a central value of the Markowitz (1952) model—being able to diversify away nonsystematic risk—is essentially unavailable to the private real estate investor.”

Furthermore, Brown (2004) states that the Tier II real estate market is defined to be privately owned investment real estate, holding a combination of ownership and control. Private real estate investing permits investors to influence the outcome. Hence, for these investors, probability is not purely random. In contrast to investing in other markets where investment is converted to financial assets, it is suggested that many prefer private real estate investment as they are more influenced by the dual factors of control and ownership. Mr. Brown also divided all other real estate two other tiers. Tier 1 is made up of smallest property containing 1 to 4 dwelling units, of which one is owner occupied. Tier 3 is the institutional properties where investment is converted to financial assets.

Roger Brown (2004) investigated the risk in real estate investment by conducting theoretical and empirical analysis of risk and returns accruing to individuals who were involved in real estate investments. Brown claimed that the returns are not normally distributed and that private real estate investors compensate for the distributional burdens their market imposes upon them by carefully assessing and controlling unavoidable non-systematic risk.

Brown’s work extends the work of Young and Graf (1996) by adding theoretical content, using different methods to generate return series, different technologies for estimating distribution parameters and investigating a real estate market with investors. Based on the concepts developed by Brown an attempt is made in this thesis to achieve the aim and objectives of the thesis as outlined below.

1.3 Aim and Objectives

1.3.1 Aim:

The aim is to develop operating rules by constructing a dynamic risk sharing mathematical model that to be used by a private real estate investor who would like to share the risk with his/her partners and yet earn a good margin.

1.3.2 Objectives:

A tested dynamic risk sharing mathematical model to be used by the Real Estate partners in order to reduce risk.

A process that will be used to update various estimates involved in the model from time to time to capture the dynamics of the real estate market scenario.

1.4 Research Approach

Throughout the course of this thesis, an attempt will be made to evaluate numerous research articles providing in-depth analysis of these categories. With the added hindsight that past research work has uncovered in these fields, it is hoped to develop the most optimal conditions for a strategic real estate investment model.

In view of the above, an important consideration will be to enhance the core competencies in risk management.

The first step in this regard is to develop a risk-shared dynamic mathematical portfolio selection model for real estate business to be used by private real estate Tier II investors. Using this model, simulation of various alternative operating rules will be carried out.

Based on the outcome of the simulation, a strategy for implementation for the selected alternative will be developed. This will then lend immunity to any private investor against market instability, and other macro factors which influence the real estate market to a certain extent. This will help the investors who would like to share the risk with his partners as well as earn a good margin.

Real-life data will be collected and will be used to test and validate the model.

Last, strategies for implementation will be developed.

1.5

Road Map

Chapter 1 presents the background of the chosen topic along with the aims and objectives, research approach

Chapter 2 presents a review of the existing literature detailing the hypotheses used and statistical and mathematical models used by the researchers in the past

Chapter 3 presents the methodology how the data will be collected which will be the back bone of dynamic risk-sharing mathematical model.

Chapter 4 presents the nature of the data collected and the methodology used for estimating the various parameters used in the mathematical model and test their sensitivity using appropriate hypothesis testing techniques.

Chapter 5 presents the operating decision rules derived by using appropriate non-linear mathematical programming technique.

Chapter 6 presents the sensitivity analysis of the parameters and the limits of the operating decision rules using simulation methodology.

Chapter 7 gives the strategies to be adopted for using the operating decision rules and the procedures for updating the parameters from time to time as required.

Finally, conclusions and future direction of studies are presented in Chapter 8.

Chapter 2: Literature Review

2.1 Introduction

Investment can be considered as the employment of capital in the acquisition of real estate or interests within for undeviating ownership or for definite use of the person acquiring it. Real estate investments in general take up an enormous amount of funds; hence it is important to device a method in order to safe guard the interest of the investor.

Throughout the course of this thesis, an attempt will be made to evaluate numerous research articles providing in-depth analysis of these categories. With the added hindsight that past research work has uncovered in these fields, it is hoped to develop the most optimal conditions for a strategic real estate investment model applicable for Tier 2. Although a broad review of the research work related to portfolio design and management in connection with real estate business is presented in Chapter 2, a discussion of the salient issues related to real estate business is presented here to justify the need for carrying out further research in the area.

2.2 What is everything everywhere (EE) Model?

DiBartolomeo, et al (2005) have constructed a model based on a popular linear model for financial assets, the “Everything, Everywhere” (EE) model, which breaks discount rate risk into two components; the risk of treasury curve movements and the risk of changes in credit related yield spreads while linking global public security to over 50 factors. The principle behind this model have been applied to a real estate scenario, where the authors have identified that traditional real estate appraisals utilize one of three basic methods to value a property: (a) replacement cost, (b) comparable sales and (c) capitalizing the expected income. The proposed model estimates the risk and correlation at both the property and portfolio levels. This will then allow a potential investor to analyze the potential risk corresponding to a possible investment as well as the particular risky components. The authors believe that by assessing risk directly through the model, they allow the problems associated with traditional risk evaluations to be averted.

2.3 Influence of Global Real Estate Crash

Goetzmann et al (1995) analyze the risks of international real estate diversification, with a particular focus on the factors leading up to a global real estate crash. The authors suggest that a real estate market crash of a global scale has more to do with economic and monetary factors than the local factors of a market. Traditionally, there has been a much reduced risk associated with investment across international real estate markets leading to international investment generating high yield returns. However, there has also been evidence of great decline in some international markets which prove contrary to this, showing that this type of diversification has some drawbacks that the authors try to address and analyze.

2.4 Return Due to Diversification (RDD)

It is well established so far that due to the volatility in the real estate markets investing entails enduring a certain amount of risk. Both practitioners and theoreticians recommend holding a well-diversified portfolio to reduce risk.

Lee (2005) states that return due to diversification (RDD) effect makes the U.S. direct real estate a particularly attractive investments for long-term investors. However, he also adds that the results are dependent on the percentage allocation to direct real estate and the asset class replaced. Lee proposes that the addition of real estate into the mixed asset portfolio not just enhances the compound return of the portfolio but also reduces the risk. He tests this hypothesis by using the annual returns in the U.S. over the period 1951 to 2001 and finds that real estate can indeed justify a higher allocation in the mixed-asset portfolio than its individual compound return would suggest.

Lee next outlines the method of Booth and Fama (1992) for estimating the RDD of an investment within a portfolio. Modern portfolio theory shows that the lower the covariance of an asset with a portfolio, the higher its contribution to reducing the risk of the portfolio and so the greater the attractiveness of the investment to the portfolio. Booth and Fama (1992) illustrate that it is this insight that explains why the contribution of an asset to the compound return of a portfolio is greater than the weighted average of the individual compound returns.

Lee concludes his study report by establishing that the effect on portfolio RDD from an allocation to direct real estate is positive when it replaces large cap stocks – debatable if it replaces bonds and detrimental if it replaces small cap stocks. Thus, the argument for including direct real estate in the mixed-asset portfolio need not rest on its diversification benefits alone. A case can be made for adding direct real estate to the mixed-asset portfolio based on its contribution to portfolio RDD and so the compound return, or terminal wealth, of the fund from which the institution could meet its future obligations.

However, Lee does not differentiate between public real estate and private real estate investments and their separate inclusion in the portfolio. It may be interesting to find effect on portfolio RDD from an allocation to private real estate.

2.5 Diversification of Investment

Diversification has long been recognized as an effective portfolio management technique. It is based on the idea that spreading investment risk across a mix of diverse assets (i.e. whose returns are not correlated with one another) produces better risk-adjusted returns over the long term. This improvement in risk-adjusted returns is by virtue of negative returns from some of the assets being offset by positive returns elsewhere.

According to Kwame et al (2002), “diversification of investment (especially when it includes international investments) can open up a wider choice of investment opportunities, give improved risk-adjusted returns and reduce volatility when the investment is in real assets. Since the benefits of diversification are maximized when there is a low correlation between the assets, a well-diversified portfolio would include assets that are either negatively or lowly correlated.

However, it would appear that the investment issue, which remains absorbing and the focus of a lively debate in the finance literature, is the rationale for the superior performance of contrarian investment strategy. Williams (1995) was the first to make implicit reference to the contrarian investment strategy by hypothesizing and demonstrating through statistical simulation that ‘‘the greater the relative balance of return from operating and reversion, the more diversified the portfolio, and thus the better the portfolio performance.”

Kwame et al (2002) modified the model to conform to the Markowitz routine, and found that the association between the cash flow concentration level and the portfolio performance index, and that between the diversification index and the portfolio performance index were stronger than depicted by Williams (1995). This implies that diversification by sources of return could improve real estate portfolio performance.

The results on the returns of various indices indicate a high degree of variability and uncertainty. Especially Equity REIT’s index shows a coefficient of variation with an average return ranging from 99.24% to 326.25%.

Kwame et al (2002) study, in conclusion, verifies Williams’ hypothesis that diversification by sources of return could complement the traditional diversification strategies to significantly improve real estate portfolio return.

Thus this review lends to the aim which suggests that diversification, in fact, could improve real estate portfolio returns, however what investment alternatives or parts thereof exactly ought to be the composition of the portfolio in order to optimize returns has not been elaborated on. That is, the degree of diversification and the extent to which inclusion of investment alternatives or parts thereof do not get mention in the study.

2.6 Contribution and Optimal Levels of Inclusion of Different Investments

The basic objective in developing a product portfolio is to maximize its return with minimum risk. In order to develop a portfolio with a low standard deviation signifying lower levels of risks, one needs to be familiar with the past development on the subject.

Based on a 25 year observation of direct private real estate (through NCRIEF equity index) and a 30 year observation for public real estate (through NAREIT equity Index) in assessing the return contribution in a mixed asset portfolio, Mueller and Mueller (2003) explore the contribution and optimal levels of inclusion of different investments in a return maximizing portfolio. The five time periods analyzed are the 5,10,15,20 and 25 year annual returns.

Substantial fieldwork has been accomplished in order to provide a foundation for the research paper.

Gilberto’s (1990) comparison of public and private real estate returns.

Mueller, Pauley and Morrill’s (1994) inclusion of REITs in a mixed-asset portfolio.

Miles and Tolleson’s (1997) revision of different public and private debt and equity investment alternatives.

14.Ziering and McIntosh’s (1997) study of the benefits of including both REITs and core real estate (using NCREIF returns) in a mixed-asset portfolio of stocks and bonds from 1972 to 1995.

Gordon, Cantor and Webb’s (1998) studies of the portfolio diversification effects of international real estate securities on a mixed-asset portfolio of U.S. stocks, corporate bonds, real estate securities and international common stocks.

Chua (1999) studies on the role of international real estate in a mixed-asset portfolio while attempting to control for higher taxes, transaction costs and asset management fees incurred when investing in real estate, as well as the appraisal smoothing in real estate return indices.

Gilberto, Foort, Hoesli and MacGregor’s (1999) test of the predictive powers of an optimal diversification strategy within a mixed-asset portfolio using a threshold autoregressive conditional heteroskedasticity model (QTARCH).

The above mentioned studies along with the findings of Ling and Naranjo (1999), Quan and Titman (1999), Ziering, Liang and McIntosh (1999), 19.Fu and NG (2001), Ciochetti, Craft and Shilling (2002) and Feldman (2003) had been critically analyzed in order to come to a viable conclusion. The analysis took into account returns, volatility, correlations and Markowitz efficiency frontier.

2.7 Real Estate Investment Trust (REIT)

Unlike real estate directly held by the investor, REITs are a liquid asset that can be sold fairly quickly to raise cash or take advantage of other investment opportunities. Using REITs, investors can diversify their holdings between various geographic areas and property specializations. REITs can tap the debt and equity markets and raise funds to take advantage of opportunities when they arise. REITs have a lower correlation to equities than many other asset classes, providing portfolio stability for those with an active asset allocation strategy. Serrano and Hoesli (2007) analyze the part played by financial assets, direct real estate, and the Fama and French (1993) factors in amplifying equity real estate investment trust (EREIT) returns and scrutinizes the expediency of these variables in forecasting returns. His study recognizes the assertion that equity REITs (EREITs) are investments whose fundamental assets are stocks, bonds, and real estate; thus uses aggregate substitutes for the set of economic and financial variables that would be useful in forecasting EREIT returns. Hence, the study by Serrano et al examines the leeway of making lucrative forecasts based on the conclusions that securitized real estate is a hybrid asset.

In order to determine the suitable model for making useful predications, Serrano and Hoesli (1993) use four models:

Capital Asset Pricing Model (CAPM) of Sharpe (1964);

CAPM with the Fama and French (1993) Factors;

Clayton and MacKinnon (2003) Hybrid Model; and

Clayton and MacKinnon (2003) Model with the Fama and French (1993) Factors

The study then examines the forecasting ability of the four securitized real estate return-generating models by employing three forecasting methods i.e. Time varying coefficient (TVC) regressions, Vector autoregressive (VAR) systems, and Neural networks models.

Forecasting accuracy has been measured with traditional statistical criteria, as well as by comparing active investment strategies based on the papers forecasts to a passive buy and- hold strategy. This helps determine not only which model specification is the most appropriate for securitized real estate forecasting, but also which forecasting technique makes the most accurate predictions. The methods used are Mean Error, Root Mean Squared Error, Mean Absolute Error, Directional Accuracy and Theil’s U2 Inequality Coefficient. In order to empirically validate the above mentioned measurement techniques, the researchers obtained data from Thomson Datastream except for the real estate series and the Fama and French (1993) factors. All indices used are quarterly total return indices for the period 1978– 2006. For securitized real estate, the FTSE NAREIT EREIT series is chosen. Datastream’s total market index is used for stocks, and the Merrill Lynch’s 7–10 year government bond index is used for bonds. As a risk-free rate, the Euro-Currency three-month middle rate is retained. The size and book-to-market factors have been provided by Kenneth French. Finally, the NCREIF Property Index (NPI) is used for direct real estate. Real estate returns are unsmoothed using the approach proposed by Geltner (1993).

The results of the above study recommended that EREIT returns are optimistically correlated to stock, size, and book-to-market factors. None the less, these associations are volatile, with stocks and size being overriding until the early 1990s, while the book-to-market and size factors dictate thereafter. With bonds, a usually positive but frail liaison is found, whereas with real estate, the relationship demonstrates much unpredictability and seems to be recurring. This study highlights the significance of models including the Fama and French (1993) factors, as well as the superiority of neural networks as a forecasting tool.

In particular, the hybrid nature of real estate securities can be exploited for prediction purposes, although supplemented with the aspect of optimizing Risk Adjusted value of total returns from portfolios could be a significant inclusion in the study negated by the authors.

Waggle et al (2006) concentrate on determining the minor effects of alterations; due to non-stationarity or assessment errors in the REIT-stock risk premium and the REIT-stock correlation on the most advantageous portfolio asset mix of REITs, stocks, and bonds. The study also uses historical return data for REITs, stocks, and bonds to generate base level assumptions.

“Monthly and annual total return data for equity REITs, large-company stocks, and long-term government bonds for the 1972 to 2002 period is primarily focused upon.

The marginal effects calculations described begin with assumed values based on the 1988 to 2002 period, the standard deviations of REITs, stocks, and bonds are assumed to be 15.8%, 18.6%, and 11.2%, respectively, The REIT-stock correlation is 0.36 and the REIT-bond correlation is 0.14, while the stock-bond correlation is 0.13. These assumptions have been taken constant throughout the paper.

On the other hand the assumed differences in the returns between REITs and stocks and between stocks and bonds vary through their analysis. In this study the functional decisions are based on the supposition that investors choose the portfolio weights that capitalize on utility U with the common function, given in the paper as:

where, higher values for A equate to higher degrees of risk aversion and vice versa. Levels of A ranging from 1 to 10 are examined. The study goes on to calculate portfolio return for the three asset case with REITS, stocks and bonds, and then the portfolio variance. It assumes two constraints to rule out portfolio short selling and assure portfolio completeness. Further the paper calculates the optimal portfolio weight, and then the calculated marginal effects of change on the portfolio weights are analyzed. The marginal effects due to changes in returns are exaggerated by the variances and covariances of the asset returns and the level of risk aversion of the individual investor, but not by the current returns levels.

The findings signify that the expected return of REITs relative to that of stocks is a much more imperative factor than the REIT-stock correlation in making portfolio decisions. The portfolio impacts due to variation in REIT returns are more evident for aggressive investors and less for more conservative investors. For many investors, the marginal effects calculated in this paper revealed that their actual, as compared to theoretical optimal, allocations would not be affected at all.

Impact of Transport Costs on Housing Decisions

This study will emphasise on the effect of transportation cost towards the decision of housing location. The case study will be held in Bandar Saujana Putra, Selangor. This study will be using the quantitative methods to further study the effect of transportation cost towards the decision of housing location.

  • Background

In the search for lower cost housing, working families often locate far from their place of work and this will resulting in the increasing of their transportation costs and commute times. However, for many such families, the transportation costs exceed their housing costs. According to Bernstein (2001), affordability has never been just about housing cost, it is actually the interaction between housing and transportation cost that provide more meaningful measure of affordability. Hence, choosing a location-efficient neighbourhood near transit, services and jobs, families can reduce monthly household expenses.

This study will emphasise on the model of land use and prices formulated by Von Thunen in 1826, a German economist. The theory concentrates on difference in relative transport costs in different types of agricultural production. According to J. Harvey (1997), he made assumptions that a boundless flat and featureless plain over which natural resources and climate are distributed uniformly and there is a central market for the area.

Furthermore, he also assumed that the farmer used uniform horse and cart transport facilities to this central market, and different foods can be grown, but since these differ in bulk, the cost of transporting them to the market also differs. For each type of product, transport cost varies directly and proportionately with distance from the central market. However, the receipts from cultivation of one hectare of land are the same for all types of product.

Given by these assumptions, it pictures the rent-paying capacity as a function of transport cost and the distance from the market. As distance from the market increases the total costs are raised by the increased cost of transport of the cultivation product. However, this study will relates this theory with the decision of housing location of the case study in Bandar Saujana. It will examine whether the theory match the pattern of the housing location in regards with the transport cost.

Bandar Saujana Putra is a new self-contained township located in Sepang Selangor. The township launched the first phase of the development in 2004, has an easy access to the town centre using ELITE Highway. Its easy access to the town made Bandar Saujana Putra an ideal for the case study as the resident able to travel to the respective location of their needs.

  • Statement of Problems:

The township of Bandar Saujana Putra is located approximately 20km from the centre of Kuala Lumpur and the residents enjoy an easy access via ELITE Highway. However, how the transportation cost is plays a role in determining the decision to reside in Bandar Saujana Putra?

Furthermore, does the Von Thunen theory explain the pattern of location theory in the case of Bandar Saujana Putra?

  • Objectives of Study:

The main objective of the study is to examine the effects of transportation cost towards the decision of housing location.

The second objective of the study is to examine whether Von Thunen theory match the pattern of location theory in Bandar Saujana Putra.

  • Scope of Study:

The study is confined to the areas of Bandar Saujana Putra, Selangor since it is located approximately 20 km away from city centre and easily accessible. The respondent of the questionnaire are limited to the residents of Bandar Saujana Putra and analysis as well as findings from the rental and property price will be used to accomplish the objectives mentioned above.

The difficulty and limitation for the study arise when distributing the sample questionnaire and to get the feedback from the respondents. There will be situation where the respondents that have been approached will not or hesitate to give cooperation to the sample questionnaire.

  • Research Methodology:

The study would be done in an analytic manner. The information that is needed to examine the issue will be obtained from primary and secondary data.

  • Primary Data:

Primary data refers to the first-hand data, which required data collection. For this study, it will mainly involve in the distribution of questionnaire to the residents of Bandar Saujana Putra. The analysis will also be done according to the study areas in order to examine the transport cost of the residents. The question will be in objective manner administered to arrive to the objectives of the study.

  • Secondary Data:

The second method is secondary data which will mostly comprise of data collection through references of such as relevant books, journal, conference paper, newspaper and magazine articles and also online references. The data will also obtain from the economic text book which further explained the theory related to the study.

  • Significant of Study:

It is hoped that the anticipated outcome of this study can benefit the government especially the Town Planners in determining the structure of local city plan. While planning for housing development and also commercial hub, the developer and town planners have to consider the factors of distance and transportation as these two related closely to the affordability factor of a household.

Secondly, this study will also benefit the house buyer in determining the location of the house as the distance and transportation cost is concern. The study will enlighten as how the location factors of property affects the daily budget of a household. The study also points to the importance of infill development that expands the supply of affordable housing in inner city and older suburban neighbourhoods that have good access to traditional job centres; the development of more affordable housing near transportation hubs and suburban employment centres.

Lastly, the study intends to benefit the students as it will open up more discussion regarding the issue. Further research can be done to improve the findings of this study and hopefully it will beneficial towards the knowledge of the students.

  • Organisation of Study:

This study will consist of five chapters where the first chapter provides a brief concept and overview of Von Thunen theory that will be discussed further in the Literature Review. The first chapter consist of the introduction of the study and also statement problem that initiates the study. The first chapter also explained on the limitation faced on doing the study and the significance of this study.

Meanwhile, the second chapter will discuss on literature review related to the study. It will mainly focus on the concept of the dynamic of Von Thunen theory in relation of the property market. The next part of the chapter will look further on the theory of urban economic and the formulation of the theory towards the locational decision. It will further strengthen the understanding of the theory based on the literature reviewed.

Chapter three will discuss further on the methodology used in obtaining the information for the study. The quantitative methods of distributing questionnaire will be discussed further as well as the qualitative research methods used in the study. The qualitative research of collecting, analyzing, and interpreting data is by observing the current market trend. This chapter will further emphasise on the case study chosen which is Bandar Saujana Putra, Selangor.

The fourth chapter of the study will shows the analysis of the data collected previously. Information and data that is obtained from the survey of the market rental will be further detailed in this chapter using the appropriate graphs and diagrams. The analysis of the findings is further discussed in relation to the patterns of economic rent in the market.

The last chapter will conclude the analysis of the findings and draws the recommendation of the further study to compliment this research. It will also determine the confirmation of the objectives of this study as well as the holistic achievement of the study.

Chapter 2: Literature Review

  • Introduction:

This chapter will explain further on the previous literature and writing in regards of the urban land use in general and Von Thunen theory of locational decision. Other than that, this chapter will also discuss on the limitation of the theory as well as the formulation of the theory.

  • Background:

Urban land use comprises two elements; the nature of land use which relates to which activities are taking place, and the level of spatial accumulation which indicates their intensity and concentration. Central areas compared to peripheral area have a high level of spatial accumulation and corresponding land uses such as retail while peripheral areas, on the other hand have lower levels of accumulation. In addition most economic as suggested by Gordon (2005), social or cultural activities imply a multitude of functions, such as production, consumption and distribution.

These functions take place only at specific locations and are part of an activity system. Therefore activities have a spatial imprint whereby some are routine activities as they occur regularly and are thus predictable, such as commuting and shopping. Others are institutional activities that tend to be irregular, and are shaped by lifestyle for example sports and leisure, by special needs for example healthcare. Still others are production activities that are related to manufacturing and distribution, whose linkages may be local, regional or global. In short, the behavioural patterns of individuals, institutions and firms have an imprint on land use and the representation of this imprint requires a typology of land use, which can be formal or functional:

  • Formal land use:

The representations are concerned with qualitative attributes of space such as its form, pattern and aspect and are descriptive in nature.

  • Functional land use:

The representations are concerned with the economic nature of activities such as production, consumption, residence, and transport, and are mainly a socioeconomic description of space.

  • Residential accommodation:

The stock of residential accommodation varies from multi-storey flat near the city centre, through back-to-back terrace houses and then semi-detached, to detached houses often standing in spacious ground. This stock of residential accommodation reflects decisions taken at some time in the past because of the building costs rule out the choice of new construction for a substantial part of the population. If the residence is to compete land away from other uses then sites would have to be developed to higher densities in or near the position of greatest accessibility than elsewhere, because sites in that area provide optimum location for higher order uses such as offices and retailing.

According to Smith (1997), there is a relationship between a person’s income, his place of residence and his place of work, although the correlation is not fixed, for individuals differ in the proportion of their incomes they choose to spend on accommodation. An individual, according to Cunningham (1999), seeking to maximise utility, must weigh his desire for access to his place of work against various possible combinations of commuting costs and accommodation prices and his other desires for urban contacts and amenities.

Incomes will determine how far a household’s residence preference can be indulged. With differing preference consumers in the same group of income may demand different type of accommodation. On the other hand, those desiring contacts furnished by near central locations have the advantage of lower transport cost but frequently have to sacrifice certain site amenities. Where persons of unlike incomes lives at distances where they incur the same commuting costs then the person with the highest income will occupy the best accommodation, and so on.

  • Urban Land Use:

Commercial land use according to Faraday (1997) and supported by Lean (2001) involves relationships with its supplier and customers as it support the claim that land use in both formal and functional representations implies a set of relationships with other land uses. A level of accessibility to both systems of circulation must be present because relationships with suppliers will dominantly be related with movements of freight; relationships with customers would include movements of people. Since each type of land use has its own specific mobility requirements, transportation is one of the factors of activity location and is therefore associated intimately with land use. Within the urban system each activity occupies a suitable, but not necessarily optimal location, from which it derives rent. Transportation and land use interactions mostly consider the retroactive relationships between activities, which are land use related, and accessibility, which is transportation related. These relationships often have been described as a “chicken-and-egg” problem since it is difficult to identify the triggering cause of change; do transportation changes precede land use changes or vice-versa?

Urban transportation aims at supporting transport demands generated by the diversity of urban activities in a diversity of urban contexts. A key for understanding urban entities thus lies in the analysis of patterns and processes of the transport / land use system. This system is highly complex and involves several relationships between the transport system, spatial interactions and land use:

  • Transport system:

It will consider the set of transport infrastructures and modes that are supporting urban movements of passengers and freight. It generally expresses the level of accessibility.

  • Spatial interactions:

It will consider the nature, extent, origins and destinations of the urban movements of passengers and freight. They take into consideration the attributes of the transport system as well as the land use factors that are generating and attracting movements.

  • Land use:

It will consider the level of spatial accumulation of activities and their associated levels of mobility requirements. Land use is commonly linked with demographic and economic attributes.

  • Accessibility:

Accessibility evaluates the net economic costs of moving persons and goods between one place and another place. It is, therefore, not only concerned with the distance to be travelled between two places but, more important, with the time taken to travel that distance, i.e., with all the factor costs in any journey (Lean , 2001). However, accessibility does not affect solely the real costs incurred by movement but also the real benefits derived.

The residential demand for urban land also depends upon accessibility but the capital sum a residential user pays to obtain a site represents a money evaluation of the satisfaction to be derived from that site. According to Goddall (2001) residential demand depends upon utility or satisfaction and the residential user seeks that the site which allows him to maximise his utility. Thus, for the residential user travelling, whether to work, to shops, or for pleasure, represent a disutility and each person wishes to minimise these disutilities such as the time and money costs of travelling.

Disutilities would be minimised if a residential user located himself on a site with a high degree of accessibility, so residential use would compete with business uses for accessible site. However, for a residential there are certain amenities considerations involved in the choice of site which confer satisfaction/utility upon the user. The amenity value of a site depends upon factors not readily assessable in financial terms such as space, quiet, fresh air, etc. According to Wardour (1997) the choice of a residential site is, in many cases, a compromise because the desire to minimise travelling disutilities demands a relatively accessible, therefore central site, whereas the quest for amenity leads towards less accessible sites some way from the city centre. Greater amenity can usually be achieved by accepting additional travelling disutility.

  • Urban Land Use Model: Von Thunen Ring Model:

The relationships between transportation and land use are rich in theoretical representations that have contributed much too geographical sciences. Several descriptive and analytical models of urban land use have been developed over time, with increased levels of complexity where all of them involve some consideration of transport in the explanations of urban land use structures according to Carter (1995). However, this study will emphasise on the oldest land use theory by Johann Heinrich Von Thunen. According to Rodrigue (2000) modern location economics began with Von Thunen (1826). Being the first to develop a basic analytical model of the relationships between markets, production, and distance he too looked upon the agricultural landscape as the purpose in this study. The relative costs of transporting different agricultural commodities to the central market determined the agricultural land use around a city. The most productive activities will thus compete for the closest land to the market and less productive activities will be located further away. The model has a set of basic assumptions which reflects agricultural conditions around a city in the early 19th century:

  • Isolation:

There is one isolated market in an isolated state having no interactions (trade) with the outside.

  • Ubiquitous land characteristics:

The land surrounding the market is entirely flat and its fertility uniform.

  • Transportation:

It is assumed there are no transport infrastructures such as roads or rivers and that farmers are transporting their production to the market using horses and carts. Transportation costs are dependent of the type of commodity being transported to the market as well as the distance involved.

Comparison of the relationships between production cost, the market price and the transport cost of an agricultural commodity is explained thoroughly as follows:

R = Y(p-c) – Yfm

        • R = Rent per unit of land.
        • Y = Yield per unit of land.
        • p = market price per unit of yield.
        • c = Average production costs per unit of yield.
        • m = Distance from market (in kilometers or miles).
        • f = Freight rate per unit of yield and unit of distance.

                     Carter (1995) further explained that all agricultural land uses are maximizing their productivity (rent) whereby in this case it is dependent upon their location from the market (Central City). Discourse community of farmer play significant role as they are to maximize his profit which is simply the market price minus the transport and production costs. The most productive activities such as gardening or milk production or activities which cost higher in transportation (firewood) are located near to the market. The above figure provides an overview of Von Thunen’s agricultural land use model with the basic assumptions being applied such as isolation, ubiquity, and transportation. It can be divided into two parts:

      • The pure isolated state over an isotropic plain (left). In this case, the model takes a shape of perfect concentric circles.
      • The potential impacts of modified transport costs (a navigable river) and the presence of a competing center (right).

      The relationships between agricultural land use and market distance are very difficult to establish in the contemporary context.

      Von Thunen primary objective was to determine the relationship between the intensities and type of agricultural production and the available markets. The physical and cultural complexities however, led him to disregard the variations in a large number of environmental and social conditions. Instead, he made seven basic assumptions, which formed the core of the theory. The ideal site consisted of completely rational (optimising) economic behaviour, an isolated state, a single central city, settlement in village far away from the city centre, and a racially homogeneous population, uniform topography, uniform climate and soil fertility, and a relatively uniform and primitive transportation cost according to Griffin (1968) and later supported by Rodrigue (2001).

      Sinclair (1966) however noted that Von Thunen primary concern was to discover and examine the laws which governed the pattern of agricultural land use existing in his time and within his experience. His dominant recognition was the land use pattern depended upon competition between various types of agriculture for the use of particular piece of land. The controlling factor in this competition was Economic Rent as defined here the return of investment in the land. Later it is sopported briefly by Rodrigue (2001) that form of land providing the greatest Economic Rent would make the highest bid for the land and displaced all others.

      The facts that transport cost increased with distance and they imparted a spatial variation to Economic Rent become an eye opener to Von Thunen whom later comes to realise that transportation costs were a primary factors determining Economic Rent. Hence, Economic Rent from any one land use can be expressed as a function of a distance from the market.

      • Limitation of the Theory:

      In constructing the model complicating factors were assumed away, providing a laboratory in which the interplay between a small number of essential causal influences and their relations with certain effect could be studied. In particular this model provided a mechanism in which changing technical and economic inputs could be linked with evolving geographical patterns of production according to Samuelson (1983) and Linehan (2003).

      The attraction was thus, that the theory simplified the world by concentrating on the effects of one primary variable, transportation costs, on the location of agricultural production. Von Thunen himself accomplished this by creating the idea of the economic margin. In his view, land use areas were bounded by margins where one use became more cost-effective than another. Given von Thunen’s thesis, Peet, (1987) could attempt to explain how these factors may have changed historically and explain changes in the location of production. The uses of Von Thunen model, or derivatives of it, continue to this day among quantitative geographers for example, Wang and Guldmann (1997); Hill and Smith (1994); Linehan (2003).

      Even in 1966, however, the limitations of the model were accepted. Gaston (1997) followed by Linehan (2003) for instance admits “Von Thunen’s analysis is basically descriptive rather than normative” and does not explain changes over time or the possible effects of economies of scale. Despite this, Smith (2000) promotes the model because it made marginal economics geographical. In the years since these limitations in particular the fact that Von Thunen ignored changes over time have often been mentioned, but the model survives in importance in the minds of geographers and is a main subject of beginning economic geography courses. The most likely reason for this is that Von Thunen rings actually appear to exist in many cases. For instance, cities are often surrounded by a dairy ring. Von Thunen rings are one of the few very easily understandable models in geography that truly appear to explain a pattern in the world, even if the model is primarily descriptive and does not give much idea about how exactly this pattern came to be or what might happen to it in the future. Harvey made this argument in Social Justice and the City (1997), arguing that social scientists are attracted to models such as the Isolated State because they appear to be empirically relevant.

      Barnes (1998), following Haraway (1997). Latour (1987) and Linehan (2003), comments on the manner in which von Thunen’s model, in particular the concentric zone diagram showing agricultural land use rings of decreasing intensity with distance from the city, has been “fetishized” within economic geography. Barnes (1998) argues, based on the work of Barnbrock (1997) and Harvey (1997) that Von Thunen’s concept of the frontier wage, the “just reward” for work done that, if paid, would ensure worker harmony, leads to a more complete understanding of Von Thunen’s work. This sense of harmony was also Von Thunen’s vision of the isolated state in general, “constructed not just an isolated state, but an ideal one”.

      The rings were “less a description of how the world is, but how it should be once social harmony was realized”. The idea that the isolated state was not just descriptive but also prescriptive is emphasized by Barnbrock (1997), who writes that for von Thunen “the Isolated State is the ‘true’ representation of the final end mankind should strive for.” He further quotes von Thunen, who states “in the Isolated State … we have in mind only the final goal”. Harvey points out, however, that this was an essentially conservative goal. Through the imposition of the frontier wage and a more harmonious land use pattern, “class conflict and social polarization” would be minimized within German society. The lesson learned by neo-classical economists, Harvey argues, was that “economic science could seek and spell out principles of social harmony without appeal to the political economy of the spatial fix”.

      The use of Von Thunen’s ideas within geography highlights the conflicts within a discipline that strives both to find regularity in the world and to explain the patterns seen in specific places. The Isolated State theory is attractive because it one of the few easily understood location theories for which empirical examples can be easily drawn. Of course, these examples are never absolutely correct and often seem overly simplistic. Barnes’ (1998) analysis of Von Thunen and the social construction of Von Thunen’s theory within economic geography particularly help understand the use of Von Thunen within agricultural economics supported by Watson (2005). The idea that Von Thunen’s theories were not just descriptive but also prescriptive more closely parallels the attitudes of the agricultural economists, who were searching not just to describe land use but often also to restrict it in order to build a more harmonious dairy economy.

      • Formulation of the Theory towards Locational Decision:

      In an attempt to test the hypothesis that market forces largely allocate the supply of sites among the alternatives uses within the urban area, Von Thunen’s agriculture land use model is adapted. The rising transportation costs explain the differentials rent among homogenous site as stated in the theory explained by Moss (2001). Understood the accessibility within an urban market will be at maximum at the city centre; the assumptions of a competitive market and a homogenous site will be given. As far as transport and commuting cost is concern the accessibility tend to decrease when distance from the market centre increases.

      Moss (2001) concluded that firms and households have no intentions to change location and ceteris paribus because profits and other objectives are maximised. Next output is optimal and the maximum efficiency of the city as a productive unit is realised. In fact, the resulting structure of land uses reflect institutional arrangement such as zoning ordinance, transportation system and policies of financial institutional as well as the competitive ranking of the city, i.e. its economic base. The location of firms and households within this structure depends heavily upon competitive bidding for specific sites since rent differentials result market forces require from each site that rent resulting from maximum utilisation or highest and best use. Maximum economic rent occurs at the market centre because the supply of sites and average transportation and commuting costs for the local market are least according to Seyfried (1963).

                     Seyfried (1963), followed by Linehan (2003) also suggested that the wages and interest are among production costs and they are assumed to be independent of location, but transportation costs rise as distance increases which later cause the rent, the surplus of gross revenue over production costs, decline proportionately. The supply of sites, i.e., more and larger land unit, increases with the distance from centre. Therefore competing user of sites will locate relative to their economic rent potential so that a structure of site values relative to location results from market forces. This structure of urban land market can be visualised as a rent or value surface; the market centre is the apex which is the point or area of highest site value. In the other word, rent decline with distance so do the value and land uses too change. If sites of equal value are related, the iso-value lines or contours are a function of site rent or value. Thus the spatial structure of land uses or the urban land market at a moment of time can be shown by the rent or value function or gradient.

      • Conclusion:

                     The chapter on literature has discussed the concept of urban land use, the linkage between urban land use and the Von Thune theory, limitation on the theory as well as formulation of Von Thunen theory. The following chapter will discuss on the methodology of the study used in gathering all the information needed.

      CHAPTER 3:

      RESEARCH METHODOLOGY:

      • Introduction:

      This chapter discusses in details the research methodology, which ensured that the objectives of the study can be achieved in a proper way. An appropriate research methodology application may avoid deviation against the objectives and gives clearer understanding on how the study is to be carried out. Validity of the research data and reliability of measurement will affect the practical research and accuracy of the result. Thus, the research methodology is directly connected to objective and problem statement of research.

      The second part of this chapter will go into details of the case study of Bandar Saujana Putra, Selangor. According to Yin (2003) a case study design should be considered when:

          1. the focus of the study is to answer “how” and “why” questions;
          2. you cannot manipulate the behaviour of those involved in the study;
          3. you want to cover contextual conditions because you believe they are relevant to the phenomenon under study; or
          4. the boundaries are not clear between the phenomenon and context.
          • Research Design:

          Research design can be classified into exploratory research and conclusive research. Exploratory research design is mostly in qualitative nature while conclusive research design is in quantitative nature. It is more focus on the collecting data from primary or secondary data. It also involves in many qualitative data collection techniques such as focus groups and depth interview (Shukla, 2008). Qualitative data collection will provide a lot of information, however it also hard to interpret from the data collection. Meanwhile, qualitative case study is an approach to research that facilitates exploration of a phenomenon within its context using a variety of

Analysing Existing Trends of Space Selling

Abstract

If an ad is created and placed in the media, the costs of creation and time or space in the media must be paid for. This is a major area in which advertising departs from public relations. Advertising doesn’t have that problem. If time or space is bought in the media, the ads (as long as they follow the guidelines set down for good taste, legal products and services, etc.) will appear. The drawback is that ads are clearly designed to extol the virtues of products and companies, and any ad is perceived by consumers as at least partly puffery. There are two basic ways to sell anything: personally and non-personally. Personal selling requires the seller and the buyer to get together. There are advantages and disadvantages to this. The first advantage is time: the seller has time to discuss in detail everything about the product. The buyer has time to ask questions, get answers, and examine evidence for or against purchase. A second advantage of personal selling is that the seller can see them. Finally, the seller can easily locate potential buyers. If they enter a store, they probably have an interest in something that store sells. Street vendors and door-to-door sellers can simply shout at possibilities, like the Hyde Park vendors who call out. From there on they fit their message to the individual customer, taking all the time a customer is willing to give them. From the above, it appears that personal selling is much better than advertising, which is non-personal. This is true. Advertising has none of the advantages of personal selling: there is very little time in which to present the sales message, there is no way to know just who the customer is or how she is responding to the message, the message cannot be changed in mid-course to suit the customer’s reactions.

Products, services or ideas are the things that advertisers want consumers to buy (in the case of ideas, “buy” means accept or agree with as well as lay out hard, cold cash). However, there is more involved in products or services than simply items for purchase.

A product is not merely its function. It is actually a bundle of values, what the product means to the consumer. That bundle may contain the product’s function, but also the social, psychological, economic or whatever other values are important to the consumer.

 

Chapter 1: Introduction

In an era when physical tail space is still at a premium, constrained by planning restrictions and rising costs, productive use of space is a key indicator of buying and merchandising success, and high space productivity depends on offering the right range, in a logical layout, with products available and easy for the customer to find. Decisions about how much space to devote to each product line and its location in the store play an important role in the pursuit of merchandising success. The aim of this chapter is to provide an insight into this process.

1.1 Space selling management:

Space selling constraint applies to all retailers, but in non-store retailing the constraints are different. A mail order retailer, for example, has page space and the number of pages in a publication as constraining factors, whilst a TV shopping channel needs to break down the airtime to different products. However, internet retailing offers great opportunities for adding space without much additional resource input. The main constraint on the amount of space used in a virtual outlet is the customer’s attention span. In spite of this additional freedom, the objectives of space allocation are essentially the same no matter which retail format is used.

The management of retail space is concerned with a number of key objectives. The first is to optimize both short-term and long term returns on the investment cost of retail pace. The second is to provide a logical, convenient and inspiring interface between the product range and the customer. This can be particularly important in a large store, where customers can quite easily become overwhelmed and lost. Another objective is to make sure that the right selection of products is available; that products fit into the retail space and that stock-outs are avoided. Choice for the customer is maximized when the best selection for them is put into the available space. Space allocation aim has an important role to play in communicating the retail brand, When ice is managed centrally it helps a chain of retail outlets to achieve visual consistency, so that customers arc reassured by the similarity of the store layout and shelf appearance.

1.2 The Space Management Process:

A retailer goes through a number of stages when allocating space to products. These four stages will they used as a framework for the Inclusion of discussion topics within this chapter.

Measuring Space Selling:

Although space in a store outlet is three dimensional, retail space is often measured in square, rather than cubic units, Square units arc appropriate where, for example in fashion retailing, a variety of single tier fixtures stand on the shop Iloor (see FigureS. I). Many fixtures, however, arc multilevel and so more appropriate ways of measuring space to allocate might be on the basis of linear or cubic footage (see Figures 8.2 and 8.3). Measurements of space that are more specific to individual retailers might be useful, such as the number of pages to be published in a catalogue or the total number of fixtures available in an outlet.

Space Productivity:

The two principal measures of retail success arc sales and profits. Sales volume and profitability can also he measured in relation to the amount of space used to generate those levels of sales and profits. This can then be compared with the level of financial investment in that space. The resulting measures express the productivity of retail space. Sales (or profits) per square meter is a commonly used measure of retail space productivity, which is an important concept in the evaluation of retail product management performance.

Dividing the space into selling areas:

At this stage, space management is concerned with allocating space to different product areas, defined according to individual retail businesses, but usually on the basis of product (department or category. The amount of space will he determined to a greater extent on previous performance indicators, typically sales values. However, sonic products, because of their physical characteristics may need disproportionate amounts of space in relation to sales. In a department store, home furnishings may need a relatively large amount of space to generate a good level of sales because the products are bulky, a large variety of merchandise is needed for customers to choose from and a lot of display space is needed to do the product justice. On the other hand, jewellery is a high value product category that needs relatively small amounts of space for display and selling purposes. The stage a product category is at in its life cycle is likely to influence the space allocation at this level. If a category is growing, then more space should be allocated, whereas a declining category needs to have its space rationalizes.

Measuring selling space using square metres

Using linear measurement for space selling

Using cubic measurement for space selling

Typical €˜hotspots’ In a Space selling

Particularly evident in department stores, where specialist products such as furniture and home entertainment, as well as hairdressing salons and customer service department’s  located on basement or upper floors, Customer flow can also be encouraged by locating high demand items throughout the store layout, with plenty of impulse items located in between. Retailers need to find a balance between maximizing sales of high demand products, generating flow around slower selling products (which may have higher profit margins), and providing logic and convenience in the layout for the customer,

Product adjacencies:

A logical route through the different product categories or departments is part of a customer focused offer, and can encourage linked sales. For example, in a baby equipment retailer like Mother cares it makes sense for merchandise to be grouped into themes for space planning purposes. These product themes are then presented in a logical way to the customer as they move through the store. Products for immediate needs, such as feeding and general baby care come first, followed by bath time and clothes; and then on to the more expensive, one purchases in the travel and nursery departments.

The barbecue season provides a good opportunity for retailers to generate interest and sell distinctive groups of complementary products. Some of these products are strictly seasonal: the barbecues themselves and the briquettes for example. However, other products can be given additional space allocations in the seasonal aisle as part of the €˜barbecue category’. Firelighters, matches, marinades, sauces, disposable tableware and beer are products that are found around the supermarket throughout the year, but are given a boost In the barbecue season by being merchandised as complementary goods.

It is estimated that guests take an average equivalent of eight drinks when they are Invited to a barbecue, and €˜studies (bulk packed small bottles of beer) are particularly popular for barbecues as they are easy to handle, €˜women friendly’, and easily chilled. Whilst the majority of barbecue beer is bulk purchased In advance from supermarkets, and then chilled down at home, convenience store retailers are often used for guests to buy drinks en route, and so providing chilled beer becomes important for this type of retail format.

Allocation space to individual product:

Having made a plan for the layout of departments or categories within the retail outlet, the next stage is to make a decision about exactly how individual product lines should be displayed within the outlet, whether the product is going to sit on a fixture, or be represented by a photograph within a page spread. Various approaches to space allocation are discussed, for example by using sales or profits as a guideline, some practical challenges arc considered, and the relationship between category management and space allocation is explored in this section.

Allocating space on the basis of sale:

The guiding principle here is the more a product sells, the more space it should be given. Retaining a high stock service level will depend on retailers ensuring that they devote enough space to a high demand product, such as milk, to prevent replenishment of that item becoming inefficient and inconvenient to the customer. A fast selling item however may not be one that a retailer makes much profit on (again milk is a good example), and so they may decide to allocate more space to their profitable lines. In taking this approach, however, the retailer is likely to encounter the problem of not devoting enough space to fast moving lines, so a balance has to be achieved. Another decision that has to be made is which €˜sales’ figure should he used for the allocation exercise, Alternatives are historical sales figures (for that outlet); market share figures; or projected sales figures.

Store A is a branch of clothing retailer XYZ in a medium sized town centre. Ten miles away there Is a regional shopping centre where branch B Is located and twelve miles In the opposite direction, branch store C Is located In the heart of a city centre shopping complex. The policy of retailer XYZ is to offer a returns policy In all of its stores for products bought in any outlet nationwide (including those purchased from its web site). Shoppers from the town where store A is located, often take shopping trips to the neighboring centres, where B and C are located, especially if they are wanting to make a major purchase such as a coat or a suit, and require a wide choice of retail stores to select from. Unfortunately for store A, any unwanted products usually end up being returned to the customer’s local store. This has the effect of distorting the sales figures for store A, upon which space allocation decisions are made. Unfortunately, the retailer’s information system does not recognize the difference between a returned garment from the original store and one returned from a different outlet. In order to counteract this problem, which can be quite widespread, a retailer would need to allocate space on the basis of estimated sales rather than historical sales.

Space elasticity:

Allocating space according to a measure of sales assumes that there a relationship between the amount of space and the rate of sales, this relationship is termed the space elasticity of a product and it refers to the extent to which the sales of a product will change in response to a changed. In the amount of space allocated to that product Research suggests that space elasticity not uniform amongst products, or across stores or departmental locations.

Using profit measures as a basis for space allocation ill prevent a business manager from allocating large amounts of best quality retail space to unprofitable products. They could mean, however, that a retailer was allocating unnecessarily large amounts of space to products that would sell as well with a smaller space. Profitable lines may not in fact sell very quickly at all, and allocating extra facings or shelves of the product may have very little impact on the sales of the product. In this case the quality of the space becomes important, so the retailer can locate high profit items in locations around the stare that arc better selling. The relationship between the sales and generated by different products, and suggests how space and ranging decisions should be made accordingly. Allocating space according to sales, and in particular, product profitability, is working with the interests of the retailer, and not the customer in mind and therefore may suggest an illogical and presentation of products. Long term profitability depends on customer loyalty, which is dependent (among many other things) upon being satisfied with the presentation and assortment of products. Fine tuning the allocation of space within a retail outlet therefore requires extensive amounts of high quality data, together with a pragmatic and customer orientated managerial approach at store level.

Productivity and efficiency and towards are visual display improvements. Once an optimum level of efficiency is achieved, space planners can move onto the objective of making their products and fixtures more attractive than their competitors. Some of the latest planning systems are able to simulate the entire store environment, so that the product manager can view an attractive plan in virtual reality and make any adjustments they fed are necessary. Recent space optimization technology applications offer the opportunity to create specific platform.

Space Allocation and Category Management:

Although the performance of individual product lines is Important to retailers in terms of the rate of sales which influences availability and the levels of contribution to turnover and profitability, the focus of performance In many’ retail organizations is at product category, rather than individual SKU level. A retailer is more interested in overall levels of sales and profits generated by their product range, rather than the sales of a single line that might be of interest to its manufacturer. The product category has emerged as a manageable classification for most aspects of product management, and certainly applies in the case of space management. In fact, many would argue that space planning and allocation and the systems that drive the process can only be properly implemented in tandem with a category management approach.

Category management seeks to optimize the depth and variety of a product assortment within a specified amount of retail space and to generate maximum profitability by seeking efficiency in the operations that support the depth and variety. This includes replenishing to guarantee availability’ and adding new products and running promotions to generate customer interest and increase short term sales of particular products, without harming the overall profitability of the category. Space allocation systems allow (Inc tuning of a category assortment, provide the means by which product and category performance can be monitored and analyzed. and by using the programme output the plans can he easily communicated and successfully implemented within the various retail out lets. In some categories key brands are dominant, in which case their presence needs to have immediate impact within the space allocation plan. Other categories are very competitive, in which case low price, budget own brand and promotional products strongly on the promotional. Many businesses use the principle that shoppers will a category from bottom to top, and left to right, and so well-known brands arc placed on middle and lower shelves on the left of the category space in order to provide strong cues to the customer. Premium products meanwhile are placed on high level shelves, selecting their high quality positioning, and the fact that the customer for premium products will seek out the better quality product within the category. In some categories the customer decision-making processes are quite unique and nerd to he fully reflected within space allocation plans. For example, the decision sequence for wine is generally as follows:

Colour —— Country of origin ——– Price Level ——- Brand

Whereas the decision sequence for yoghurt might be:

Natural or flavored ——— type (low fat, standard or luxury) —- Price Level —– Brand Name

These decision processes should determine how products arc displayed within the category space.

In certain modes, if the product is maintained in the offer, long-term customer satisfaction will be retained In spite of the Individual poor product performance. Therefore it is the store’s personality traits that determine the core product ranges, and not the size; the size of the outlet determines the width and depth of the selling type that would appeal to the local customers, Stores are empowered with the merchandise that allows them to drive local market opportunities and local suppliers can also be involved in the process of providing tailored products for individual store needs, As retailers offer more formats from which customers may choose to shop, format preferences and product preferences can be matched, For example, Tesco found that its online shoppers tended to from more affluent backgrounds, and so the on-line product offer is tailored accordingly, with a large range of wines and few value lines,

For many small retailers the cost of a computerized space planning is prohibitive, and so many rely on basic sales and profit margin analysis combined with trial and error in space allocation decision making.

1.3 Summary:

A great deal of space selling is carried out in order to achieve relatively short-term retail objectives, such as maximizing the benefits of a product or departmental promotion, meeting seasonal sales figures, or improving branch profitability. However, the long term strategic objectives of the retailer provide the framework within which these decisions are taken. Space allocations must be in line with the overall positioning strategy of the retailer; the variety and depth of assortment and the stock availability service level should not be compromised by the need for short-term productivity gains. In addition, the arrangement of products around the store needs to be considered in the light of the contribution that product items, brands and categories make to the positioning statement, it may be necessary to over-represent new products or to allocate extra space to growing or seasonal categories in order to reinforce an innovative product positioning strategy. The local customer profile may also lead to exceptional space allocations in an effort to meet individuals’ requirements more closely. However, the retailer’s space is the extent of its empire, and every inch of that space must be used to its maximum effect even if, as we shall see in the next two chapters, some space is designed to he devoid of products. The measurement of that effect, however, must be appropriate in terms of the overall aims for that space.

Chapter 2: Literature Review

Space Selling:

Space selling refers to space available for advertising in different media. The advertising media available are print, electronic & outdoor. The space available and intend for advertising in different media. Decision about how much space to devote to each product line and its location plays an important role in the pursuit of merchandising success. The aim of this thesis is to have an insight into this process. First will have to understand that the services of every publication/channel, costs of space selling. The ads featured in it. And a space seller to sell that advertising space/time to potential advertisers.

2.1 UCPL acquires marketing and space-selling rights for Lemon TV and Jhankar TV:

K Sera Sera’s recently launched free-to-air channels — music channel Lemon TV, and Hindi movie channel Jhankar TV — have appointed Universal Communication Pvt. Ltd (UCPL) for their marketing and space-selling rights. UCPL is a player in the space of airtime selling and marketing of serials, television programmes and feature films for various television networks in India. Jhankar TV will particularly target the Hindi speaking audience. This is a channel that would reach to the audience of cable and satellite in UP, Bihar, MP and Rajasthan. On the other hand, for Lemon TV, they are planning to have different kinds of event and programmes like Lemon party. This will bring in more interactivity too with the relevant TG.’ When asked about the marketing challenges for these new channels, ‘Every new channel in India right now faces the challenges of clutter and telling the advertiser what difference does this channel bring to the table, and what is the value addition. These channels are also in the same situation and we are confident about overcoming these challenges.’ UCPL is associated with media and advertising agencies like Mindshare, Mediaedge:cia, Madison, McCann Erickson, Lintas, etc., and with clients like Hindustan Unilever, Procter & Gamble, and Godrej, among others. As a company, UCPL has now diversified into full-fledged events and brand promotions, striving to create and mange innovative concepts, thus offering their client complete 360-degree solutions.’

2.2 Using the blogging concept to sell wikis:

If a person understands what a blog is, the wiki may be compared and contrasted to a blog. A blog enables a single person to get a message out. A wiki enables a group of persons to assemble a body of knowledge. A wiki can be presented as a blog with one major post (the purpose, topic, idea of the wiki) that others can build knowledge around, without the initiating post getting buried in archives as new posts arrive and are displayed in reverse chronological order.

A wiki may be sold as a horizontal blog platform. Blogs are vertical, recent updates on top, all others shoved down into oblivion, with only tags, categorical sidebar listings, or site search to dredge them up again. But a wiki distributes all the information in a more horizontal, flat, single surface that stretches through pages spread out, not sedimented. The wiki may be sold as a web site set up for idea construction; it is team-architected rather than single-authored. Blogs tend to be univocal and identifiable; one known person expounding a position, with audience members invited to comment on the sermonizing, but not really authorized to begin their own topic threads. Wikis are multimodal and transiently anonymous, many unknown people working together. A wiki, thus is like a super-democratized blog. A blog where the walls between bloggers are audience is dissolved. The audience members become the contributing authors and the originating authors become the audience, and vice versa.

2.3 Modern Trends in Working Styles:

Another interesting way of presenting wikis has to do with the fact that they allow for easy remote working. One of the main advantages a wiki provides is the fact that it is available from any internet-connected web browser, at any time. Information can be worked on efficiently in an asynchronous manner. In this regard, wikis solve tricky coordination problems.

What’s more, a wiki provides a virtual space where all relevant business information can be stored. Hence people working from different places, at different times of the day can still end up with a coherent document. A wiki is more efficient than e-mail for the resulting document can almost be exploited immediately and its last version is “always on top” (which is quite useful when working with more then one person).

2.4 The Advantages of Asynchronous Communication:

Wiki content growth and increasing value in an organization by facilitating asynchronous communication which is often more convenient than other forms of collaboration that require “face time” or “same time”. On the other extreme, making large batches of content (Power Point, White Papers) are inefficient simply because they require the author to provide context and content, some of which may be error laden or out-of-date. Wikis allow smaller batches of contribution to appear at any time, thus relieving two bottlenecks to collaboration. Add to this the fact that they are completely auditable for contribution, and the need for creating “credit” concurrently is removed.

2.5 ROI on social software:

Being able to make a business case will be very important to all convince for every enterprises and after than to make a start on adopting social software. Charlene Li has a contribution about ROI on blogging. But Return on investment has to be calculated for all sorts of social software.

Then again, ROI is becoming increasingly irrelevant when online collaboration tools and social media platforms are available for free, or at extremely low cost. Many companies find they can get along just fine with the free versions of blogs (lBlogger), podcasting (Odeo), video uploading and player embeds (YouTube), and wikis (Socialtext).

ROT (return on time) is the far more challenging aspect of social software. It takes a significant investment in time to become known in the blogosphere, for example. Bloggers must spend large amounts of time in researching topics, writing posts, linking to other Blogs, interacting with comment posters, reading other Blogs, posting comments at other Blogs, producing multimedia content, emailing other bloggers, and adding features and functionalities to a blog. All this in addition to remaining informed about ones industry or field of study.

Warning top management about falling behind in competitive technology should be sufficient to begin a case for online collaboration tools. Explaining that the trends are massively aligned, user-generated content, customer co-creation of product, corporate contributions to innovation, and universal content utopia, advocates of social software and user media can point to great examples of Peer Pioneers companies leading the way: P&G, IBM/Linux, Second Life, Digg, Jigsaw, YouTube, and InnoCentive.

2.6 Successful Strategies for Selling Ad Space on Low-Traffic Websites:

Upon first thinking about it, the idea of selling advertising on a website or blog with limited traffic seems a bit daft. After all, aren’t most advertisers interested in putting their product in front of the highest number of eyeballs possible? Approaching them with piddly visitor numbers seems like a surefire way to end up in the deleted folder.

But though it may feel like putting the cart before the horse, there are many good reasons and ways to sell ad space on low-traffic websites. What you need to always keep in mind is that, while advertisers are drawn to high traffic numbers, they desire something else even more: high conversion rates. There are plenty of success stories of websites that have limited traffic but sell a ton of advertising. These websites succeed because they do one thing well: they deliver the right type of customer to the right type of business.

Space selling concept:

* Take a close look at your website – Whether they sell landscape or skyscraper ads, text ads, video or any other format, they have to offer something of value before you can start to sell advertising space. They know this sound obvious, but it always surprises them how many publishers and online media owners come up with a niche product that nobody wants to buy advertising space in! If they are going to make a fortune in selling subscriptions or other membership related offerings, then fine – but in most cases, forget about their hobby or leisure interest, unless it is unique and offers a great angle. Do make sure their product is going to be attractive to a large enough audience before they attempt to sell advertising – and if they have a fair bit of competition, make sure that they have some unique selling points and formats. As they move into Web 2.0 the requirements from a lot of advertisers will change. If they can offer a new format or idea and take the hard work out of it for the advertiser, they are onto a winner. If they don’t, they’ll lose out to their rivals.

* Choosing ad formats that will sell – Not all ad formats sell well on ALL websites. Put another way, some ads work better on consumer websites than they do on business sites – and visa versa. The trick is to test their ads with different messages, fonts, colours and designs. This research will be well worth it in the end and can make the difference between making a decent revenue stream and making a substantial one. One of the biggest things to bear in mind is where the advertising should be placed. If they sell products on their site, there is very little point displaying adverts, which could detract potential customers away from their own sales message. So, the first thing they need to do is highlight the sections and pages where they are happy to accept advertising. When they have done that, they can then take a look at design and placement. Always think of the customer when you think about designs, placements and tracking. Make it simple for advertisers to find and relate to the formats, as they will have to justify the ad spend to their bosses.

* Reporting and statistics – This is a vital part of their business! Remember, communication is the key to long-term success. If they don’t have a good reporting and stats package in place, then they will find it difficult to show their customers what they are/could be getting from their services. This can take a bit of time to set up, but it really is worth the time and money they put into it. Once in place, it can be automated to match their business model and to provide an essential package for their existing and potential customers. Remember out of sight, out of mind – leave it to their competitors to make this mistake!

* What are their competitors doing well? – Even if they are offering a good service, they bet there is something they can learn from their competition. Some media companies do have the luxury of having someone w

Analysis of Awareness of Real Estate Investment Trusts

Investment in general, and property investment in particular, have been traditionally regarded more as an art than a science, where investors, decision-makers and analyst rely more on their experience, subjective judgement and quantified evidence.

Real Estate Investment Trust or REITs is a new medium of investment specifically in property investment in Malaysia. Malaysia is the first country in Asia to introduce property trust and only in 1989 was listed in Kuala Lumpur Stock Exchange. The property trust was then facing some issues such as potential conflict of interest, a lack of focus on asset management and thin trading volume and then led the Real Property Investment Trust to be announced.

REITs in Malaysia growth perfectly with stimulate the growth of property sector in this country. Malaysia then introduces the first of its new REITs, with the Axis REIT. YTL Corporation, Malaysia’s biggest builder, established the second REITs later, with properties in the REIT including the JW Marriott Hotel and Starhill Shopping Center in Kuala Lumpur. Besides that, other REITs that now established in Malaysia are Hektar REITs, Tower REITs, and also UOA REITs. Other companies in Malaysia that are expecting to join for REITs include Sunway City and the Landmarks Group.

Most of the REITs companies in Malaysia own the real property asset such as shopping malls, hotels and also apartment buildings and they generate income from owning the building and also rental income from the buildings. The investors physically own a part of the building depending on the size of the share that they invest. Through REITs, investors can invest any amount that they want to own REITs. They can sell it anytime with the easiest way through stocks market. Compared to normal properties, the transaction cost of buy and sell REITs are much lower. But REITs does not like other unit trust, which is sold through agents or other peoples, but it is traded in stock exchange. So it gives return to investors in form of dividend and also capital appreciation from price change. This way, shows that REITs is a secured investment that protect investors interest and it works under the guidelines or frameworks that have been set up by government.

  • Background:

The investment characteristics of property are significantly different from the characteristics of assets in other investments. REITs in Malaysia is so attractive as Malaysia now is developing country. There is still a gap between Malaysia and others develop country in Asia. In order to put Malaysia in same level with Asia develop country, most of REITs managers are with option and plan to growth their property portfolio to trade or manage rental in order to achieve it. It also will give a better yield for investor if our country is same level with others. In order to improve market performance of REITs, the REITs Company should consider developing new opportunities, acquiring more properties into their portfolio and also to some countries, or joint developing property project.

The relation of both legal frameworks and the market performance will give a picture to investor and other people who interested in this investment. The REITs sector need to provide more chance to other people to invest and it will help Malaysian generate more income others than monthly salary and to boost up economy in this country.

  • Research Question:

Finance in real estate is just a popular way of investment nowadays. The market performance of REITs shows the good results this few years. With the regulation that set up by government, surely REITs is the secured investment. But is there many people in Klang Valley that come from middle-income group realise about this investment in this develop country?

  • Objectives:

The main objective of this study is to determine the level of awareness towards REITs among middle-income group in Klang Valley.

In line with above, this study also seeks to study types of REITs available in Malaysia Besides, these study also to discuss about the way to introduce REITs in Malaysia in order to make REITs the favourable investment medium.

  • Scope of Study:

In overall, this research is confined to REITs in Malaysia which in an attractive investment nowadays. This study covers the types of REITs available in Malaysia and also people awareness about it. Other than that, this study is carried out to know what is the way of promoting REITs that people prefer.

  • Methodology:

This research would be done in an analytic study manner. The information that is needed to examine the issue will be obtained from primary and secondary data. The primary data refers to the first-hand data, which required data collection that is the distribution of questionnaire. The questionnaire will be distributed to certain amount of Malaysian with a different background.

Secondary data or desk research refers to the data that already exist, mostly in quantitative form. In this study, most of the secondary data were obtained from;

      1. Academic research on REITs and journals.
      2. Website of REITs Company.
      3. Other dissertations.

      Data analysis will be done through frequency analysis. Frequency analysis is used to determine the frequency of certain choice for the questions. Most frequent answer will be given the priority. The results will be shows in diagram or graph to show the popularity answers.

      • Significance:

      It is hoped that the anticipated outcome of this study can benefit the:

          1. The REITs Company where they will more alert toward the middle-income people awareness of REITs and the way people wanted REITs to be promoted.
          2. The interested investor and also the student, as a reference on the information that relates to REITs.
          • Organisation of Research:

          This study consists of five chapters where the first chapter provides a brief concept and view on the topic that will be studied in this research. It consists of introduction, objective of study, scope of study, significance on research and also organisation of research.

          Chapter two discuss on literature review about REITs in Malaysia. The discussion will be on definition of REITs, the types of REITs in Malaysia and also the list of REITs companies. Other than that, the discussion also will describe on how REITs work and also the benefit of REITs. The definition on middle-income people and background of Klang Valley also will briefly explain.

          The next chapter, chapter three is on methodology. In this chapter, methods used to construct the questionnaires will be outlined. This chapter will highlight how the administration of the questionnaire which will conduct to respondents.

          Chapter four is the finding and analysis of data obtained through questionnaires survey. The analysis of data obtained will determine the level of awareness towards REITs among middle-income people in Klang Valley. Through the survey, the preference way of promoting REITs also can be discover.

          The last chapter, which is chapter five, is the conclusion and limitation of this study. The best suggestion of promoting REITs also will be stated in this chapter. The weaknesses and strengths of the study may be included. Some suggestions for further study will also be included in this study.

          In the next chapter, a review of related information about REITs will be explained. The explanation will cover definition, types, how REITs work, REITs companies in Malaysia, the legislation of REITs Islamic REITs and also the future prospect of REITs.

          Chapter 2: Literature Review:

          LITERATURE REVIEW:

          REITs which stand for Real Estate Investment Trust is an investment that relates to properties. Trust fund has been introducing in this country since 1986, but REITS; a part of trust fund is a new medium investment only famous around few years back. REITs is an investment vehicle for investors to invest in large-scale income producing real estate.

          With the concept like unit trust, this investment gathers pool of money from all sizes of investors. REIT based companies will invest, manage and distribute rental as dividend back to the investors by yearly basis or depends on the agreement that have been signed before.REITs is a liquidity investment which It is being trade in Bursa Kuala Lumpur with ease of buy and sells back like a normal equity.

          As the years flow, REITs is not new to the world especially in many other developed countries. REITs usually targets for a long term investor with moderate risk such as insurance companies, unit trust funds and even individual investors. REITs invest in a variety of real estate properties such as office buildings, shopping malls, warehouses, apartments and hotels. The investor also has the added advantages of holding a liquid asset in the form of shares that can be sold on the market unlike the real estate itself which is illiquid. Investing in REITs provides the investor with dividend income and also allows them to own a real estate portfolio rather than just a single building.

          This chapter then will briefly explain about Klang Valley, middle-income group, history of REITs in Malaysia, types of REITs, how REITs work, and REITs companies and also about the legislation of REITs.

          • Klang Valley:

          My research focus on awareness towards REITs among middle-income people in Klang Valley, Malaysia. Malaysia is located in Southeastern Asia, peninsula bordering Thailand and northern one-third of the island of Borneo, bordering Indonesia, Brunei, and South China Sea, south of Vietnam. It is comprised of two separate geographical regions which are Malay Peninsular and the states of Sabah and Sarawak.

          Klang valley is an area in Malaysia comprising Kulala Lumpur and its suburbs, and adjoining cities and towns in the state of Selangor. Tis valley is named after Klang River, the principal river that flows through it which is closely linked to the early development of the area as a cluster of tin mining towns in the late 19th century. Development of Klang Valley took place largely in the area between Gombak and Port Klang but the urban areas surrounding Kuala Lumpur have since growth towards the border of Negeri Sembilan and the north towards Rawang.

          Klang Valley has a total population around 7.6 million people in 2009 and estimated to growth due to the people migrate from other states towards Klang Valley and also a population growth. Klang Valley is the heartland of Malaysia’s industry and commerce.

          Regions of Klang Valley and their corresponding local authority:

              • Federal Territory of Kuala Lumpur.
              • Kuala Lumpur City Hall.
              • Federal Territory of Putrajaya.
              • Putrajaya Corporation.
              • Selangor district of Petaling.
              • Shah Alam City Council.
              • Petaling Jaya City Council.
              • Subang Jaya Municipal Council.
              • Selangor District of Klang.
              • Klang Municipal Council.
              • Selangor district of Gombak.
              • Selayang Municipal Council.
              • Selangor district of Hulu Langat.
              • Ampang Jaya Municipal Council.
              • Kajang Municipal Council.
              • Selangor district of Sepang.
              • Sepang Municipal Council.

            For further information about the location of Klang Valley.

            • Middle-Income Group:

            There are three classes of income in Malaysia. These classes indicate Malaysian monthly income and also their household. The three (3) classes including low-income people, middle-income people, and high-income people. Below is the income groups in Malaysia.

            Middle-class income is define as the socioeconomic class between the working class and the upper class, usually including professionals, highly skilled labourers, and lower and middle management.( Source: http://www.answers.com/topic/middle-class).

            • Background of REITs in Malaysia:

            Malaysia is the first country in Asia to introduce property trusts. In 1989, the first trust was listed in Kuala Lumpur Stock Exchange. The regulatory framework of property trust, approved by the Bank Negara in 1986, was restrictive and provided no tax transparency. But there still an issues that arise such as lack of focus on property management and also conflict of interest which led the property trust to be private.

            In 1995, a revision of the property trust guidelines were done but it fail to give a good impact to investors and also to market. Then, in February 2005, there is another revision with led the property trust be renamed as Real Property Investment Trust (REITs). The major income of REITs is from rental and the profit is required to distribute to holders or investors in dividend. The guidelines also been revised to provide a good regulation for a REITs in this country.

            Malaysia was the first Islamic country to certify REITs and also the first country in Asia where REITs conquer agriculture land. A plantation REITs also much like conventional REITs. It will be the crops planted on the land and the success will depend on the sizes of assets injected to the trust. The potential plantation to be expected is oil palm because of the high demand on the production. Other than that, palm oil also undergoing the research to become a biodiesel product and in become more attractive after the increasing in oil prices. The plantation land or agriculture land also can be developed to residential area or commercial area due to the development of town.

            • Types of REITs:

            REITs has several types with drives to a different prospect of REITs but it still relates to property as a main core to invest on. In others country they apply a lot of types of REITs. But in Malaysia we only apply three types of REITs. There are Equity REITs, Mortgage REITs and also Hybrid REITs.

            • Equity REITs:

            Equity REITs is a publicly traded company that, as its principal business, buys, manages, renovates, maintains and occasionally sells real properties. (block,2006).Properties are usually purchased to invest is an income-producing real estate such as hotels, shopping malls and also apartment buildings. This type of REITs is different from others because REITs usually companies will purchase or develop the property and operate it as a part of their portfolio rather than sell it. Besides, Equity REITs is a long term investment because they earn dividend from rental. In additional, this type will let investors not only just to choose the type of property they want to invest in, but also the location of the properties. (Block, 2006). It means that the investors can make a choice on their own with the advice of the agent or REITs managers in order to make a good investment and to gain a good dividend.

            • Mortgage REITs:

            A mortgage REITs is a REITs that focus on makes on holds loans to the property developers. (All about Investing: The Easy Way to Get Started by Esme Faerber: page 89). Rather than investing in properties,this type of REITs sometime loans money for purchase existing mortgages. The revenue earns is from the interest charge on the mortgage loans and pass on shareholders. Mortgage REITs is more sensitive compare than other REITs because of the prices of mortgage REITs react opposite from interest rates. It is good REITs to invest if there is a rumour of dropping in interest rates.

            • Hybrid REITs:

            Hybrids combine the investing principles of mortgage and equity REITs, diversifying between making mortgage loans and direct property ownership. They earn both rental and interest income. (http://www.allaboutskyscrapers.com/REIT_types.htm). They buy, develop, and manage the properties and provide financing through mortgage loans. Most hybrid REITs have a stronger position in their financing account. The most famous industry that using hybrid REITs is private healthcare industries, where the financial company will provide mortgage to healthcare company, hospital management and also to buy properties such as land and building and also medical appliances.

            Equity REITs seem to be the most popular REITs recently. Between three types of REITs, mortgage REITs is the most risky which in involve in lend money to developers. Every type of REITs has different level of risk so investors should study and evaluate which REITs they want to invest in. The wise result will make the investors smile widely because of the “big fish”. Chan, Erickson and Wang (2003) find that equity REITs pay out more dividends than mortgage REITs. The reason is that equity REITs offer the potential for capital gains in addition to current income.

            Structure of REITs:

            Source: Practice and Prospect of Islamic Real Estate Investment (I-REITs)in Malaysian Islamic Capital Market by Dr. Asyraf Wajdi Dusuki.

            Manager: A man or woman who controls an organization or a part of organization.

            Property manager: A man or woman who controls the management and maintenance of the building. He or she will ensure the building in the good condition which safe to fit tenants in.

            Tenant: A person who pays money (rent) to the owner of a room, flat, building or piece of land so that he or she can live in it or use it.

            Trustee: A person who looks after money or property for somebody else.

            Unit holder: An owner of one or more units in a mutual fund.

            How REITs Works:

            It’s true that investment most favourable today will be the one most prized tomorrow, and then real estate is definitely due for love-in. Investing in income-generating real estate can be a great way to increase your net worth. But for many people, investing in real estate, particularly commercial real estate is simply out of their budgets. REITs is a saviour to people when with REITs people can invest in small amount but with a large-scale of real estate group.

            REITs which means real estate investment trust essentially the organization that own and manage a portfolio of real estate and mortgages such as shopping malls, hotels, apartment buildings and also agriculture lands. REITs does not mean for a restrict group, but this share can be own buy anyone. REITs offer people the ownership of the property without any risks because all of the problems will be covered by agents or REITs managers.

            There are advantages when investing in REITs because of the liquidity and diversity. It is unlike actual real estate, where REITs can be easily and quickly sold. People will face less financial risk because of investing in a portfolio rather than single building because of the problems such as irresponsible tenants, economy impact to the property rental market and market value, and so on.

            REITs has a board of directors that elected by the shareholders. The shareholders have a power to eliminate any board of directors that does not fulfil their requirement. The board of directors usually came from a people with an investment background especially in REITs field. They will assist a REITs managers; person who will manages the operation of the property. The power to choose what types of real estate to invest in is on board of directors.

            REITs investment for investors starts when they invest certain amount of money in a REITs fund. The amount of money depends on the REITs managers who will arrange the investment on the properties that have been agreed by board of director. The investors can have an eyes and ideas on what types of the properties and the location. They have a choice whether want to agree or not with the properties. If they agree with the properties, they can sign a document to clarify the investment.

            Then the properties will be rent out or mortgage in order to earn money. REITs has a several method to measuring the profit but the suitable one called Funds From Operation (FFO). The National Association of Real Estate Investment Trusts (NAREIT) defines FFO as:

            Net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.

            Source: http://home.howstuffworks.com/real-estate/reit2.htm.

            The REITs industry use FFO to measure performance and to establish dividend payouts. Kallberg et al (2003) reported that REITs consistently pay out about 85% of FFO as dividends. The payouts from REITs are consistently higher than other types of equities. In other words, FFO is defined as the net income, excluding gains and losses from debt restructuring and property sales, adding back property depreciation and amortisation, and after adjustments for unconsolidated partnership and joint ventures. The net income is referring to rent and sales computed according to Generally Accepted Accounting Principles (GAAP).

            However FFO is not a necessary way to determine performance and dividend payouts. Not all REITs calculate FFO according to the NAREIT definition because some of the important items are missing from the formula such as maintenance, repairs and also expenses. Thus, investors must always read a company’s report and any others supplemental information in order to get an exact FFO.

            REITs Companies:

            In Malaysia, there are several amount of business runs base on REITs. These companies have been success to put property market in this country in a good condition. These companies also expend the real estate industry with so much new types of building. Below is briefly an explanation about ten (10) well known REITs companies.

            • Al-‘Aqar KPJ:

            Al-‘Aqar KPJ REITs established on 28 June 2006 is a Malaysian-based unit trust. The objective of this investment is to own and invest in Syariah-compliant real estate and it has been acceptable to invest in properties which compromise Ampang Puteri Specialist Hospital Building, Damansara Specialist Hospital Building, Johor Specialist Hospital Building, Ipoh Specialist Hospital Building, Puteri Specialist Hospital Building and Selangor Medical Centre Building. There are nine (9) others hospital under KPJ that potential to be injected under Al-‘Aqar KPJ such as Tawakal Hospital, Seremban Specialist Hospital and also Penawar Hospital.

            • Amanah Raya:

            Amanah Raya REITs is subsidiary of Amanah Raya Berhad and wholly-owned by Minester of Fianace Incorporated. Amanah Raya REITs listed on Bursa Securities Malaysia Berhad on 26 February 2007 with a total asset siza of RM337 million.

            Today, Amanah Raya REITs has a diversification portfolio comprising hospitality, education and also commercial properties such as SEGI College, Holiday Villa Langkawi, Holiday Villa Alor Star, Wisma Amanah Raya Berhad, Wisma UEP, Permanis Factory and also Blocks A&B South City Plaza.

            • AmFirst:

            Established on 28 September 2006 under the Trust Deed, AmFIRST then entered into between Am ARA REIT Managers and Mayban Trustee Berhad. AmFIRST managed by Am ARA REIT Managers Sdn Bhd.

            Three months then, Am FIRST was listing on the Main Board of the Bursa Saham Malaysia Berhad on 21 December 2006. It shows an innovative makeover of AmFIRST, the first listed property trust fund in Malaysia.

            This REITS company is the largest Malaysia-based commercial REITs with exposure to the office, retail and hotel sector in Klang Valley area. Currently manages six office building, where three are located within the Kuala Lumpur Golden Triangle; AmBank Group Leadership Centre, AmBank Group Building, and also AmBank Tower, and one each in Petaling Jaya, Kelana Jaya, and Subang Jaya. AmFIRST also manages four-star hotel and a retail mall located in Subang Jaya, The Summit Subang, USJ.

            • Atrium:

            Atrium REITs is a first logistic property approved in Malaysia. The objective of Atrium REITs is to invest in portfolio in order to reward investors or unit holders a maximise income and to acquire a high quality assets to achieve a long-term growth in a net income for distribution of dividend.

            This REITs then was first approved by the Securities Commission in October 2006 and then listed on Main Board of Bursa Saham Malaysia Berhad in April 2007. Atrium REITs has an 809, 668 sq ft (75, 220 sq mt) approved portfolio of investment properties which comprises of four freehold industrial properties currently leased to reputable and strong financially tenants. All of their properties located in Kuala Lumpur and Selangor, the fastest growing area in this country.

            • Axis:

            Axis REITs is the first REITs list on Bursa Malaysia Securities Berhad on 3 August 2005. On 11 December 2008, Axis launched Islamic REITs which is the first in Malaysia. Axis own diversified portfolio of properties especially in Klang Valley, Kedah and Johor comprising of commercial offices, light industial building and also warehouse.

            Buildings that portray an image of Axis are Axis Tower and also Crystal Plaza. Both if this building are next door to each other and located along the busiest road, Federal Highway. These buildings are well maintain and easier accessibility. Other Axis properties are Delfi Cocoa in and BMW Asia Technology Centre PTP in Johor and also Giant Hypermarket in Sungai Petani, Kedah.

            • Hektar:

            Hektar REITs is a Malaysia’s first retail-focused REITs. Listed on the Main Board of Bursa Saham Malaysia Securities on 4 December 2006, Hektar portfolio currently consists of shopping centres in Subang Jaya, Melaka and Muar. As of 31 December 2009, all of these properties was value of RM720 million.

            Hektar REITs is managed by Hektar Asset Management Sdn Bhd which a part of Hektar Group.

            • QCT:

            QCT (Quill Capita Trust) REITs was listed in Main Board of Bursa Malaysia Securities Berhad on 8 January 2007. QCT is managed by Quill Capita Management Sdn Bhd. QCT main investment in REITs is a commercial properties.

            Until 31 December 2009, QCT has ten (10) properties with 1,288,149 sq ft net lettable area valued RM 788.4 million. The properties including part of Plaza Mont’ Kiara, Quill buildings, Wisma Technip and also tesco building in Jelutong, Penang.

            • Starhill:

            This REITs was established on 18 November 2005 by a trust deed entered between Pintar Projek Sdn Bhd and Mayban Trustee and listed on Main Market of Bursa Malaysia Securities Berhad on 16 December 2005. Starhill REITs is focusing on retail and hotel properties investment.

            As for February 2010, Starhill REITs is the largest Malaysia’s real estate investment. This REITs has four (4) portfolio located in the heart of Kualu Lumpur; Starhill Gallery, JW Marriot Hotel, Lot 10 Shopping Centre and also The Residence at The Ritz-Carlton.

            • Tower:

            Tower REITs is established on 21 February 2006. The objective of this company is to invest primarily in a portfolio of quality office building and commercial properties to provide regular and stable distributions of dividend to unit holders or investors and also to achieve a medium-term growth in the net income. In order to achieve their objective, Tower REITs implement several key strategies such as optimisation of capital structure, active asset management and also acquisition growth.

            The portfolio of this REITs company consists of three buildings located in Kuala Lumpur. First is Menara HLA, the 32-storeys office tower located in the heart of Kuala Lumpur Golden Triangle. With a net lettable area of 396, 820 sq ft, it has a blue chip tennats such as Hong Leong Assurance Berhad. Next, HP Towers comprises of two blocks of 9-storeys and 21-storeys and 3 levels of connecting podium. Situated in Bukit Damansara, this towers has a net lettable area of 350, 056 sq ft with a Hewlett-Packard (M) Sdn Bhd as a tenants. Lastly, Menara ING situated in Jalan Raja Chulan, the main central business district of Kuala Lumpur. Tower REITs only own 78.3% of the total share unit of the building and 100% leased out to ING Insurance Bhd.

            • UOA:

            &nbsp                UOA REITs was established on 28 November 2005 and listed on the Main Board of Bursa Saham Malaysia Securities Berhad two days later. UOA REITs is focusing on commercial properties.

            With a diversification portfolio of properties, UOA manages to maintain four building in Kuala Lumpur area. First is UOA Centre, a stylish 33-storeys office building situated between Jalan Pinang and Jalan Perak. Tenants of the building include financial services companies and also trading companies.

            Next is UOA II which located near to UOA Centre. With a contemporary designed, this 39-storeys building has a mixture of tenants from government agencies, multinationals insurance companies and law firms. Other than that, a 13-storeys office building located in Jalan Dungun, Damansara Heights name UOA Damansara is one of the UOA properties. Law firms, international associations and trading companies are a part of tenants for this building. Last is UOA Pantai located strategically in front of Menara TM. This 7-storeys of building consists of tenants include multinational corporations and so on.

            • Regulation of REITs:

            In Malaysia, REITs govern by a statutory body name Security Commission Malaysia (SC). SC was established on 1 March 1993 under the Securities Commission Act 1993 and it is a financial regulatory agency. It is the central authority to regulate and develop the capital market.

            SC has big responsibilities in order to ensure the safety of the investors under the Act includes:

                • Registering authority for prospectuses of corporations other than unlisted recreational clubs.
                • Approving authority for corporate bond issues.
                • Regulating all matters relating to securities and future contracts.
                • Regulating the take-over and mergers of companies.
                • Regulating all matters relating to unit trust schemes.
                • Licensing and supervising all licensed persons.
                • Supervising exchanges, clearing houses and central depositories.
                • Encouraging self-regulation.
                • Ensuring proper conduct of market institutions and licensed persons.

              Source:http://www.sc.com.my/main.asp?pageid=350&menuid=376&newsid=&linkid=&type=

              • New Islamic REITs:

              The introduction of Islamic REITs is viewed as one of the most significant initiatives to broaden and deepen the product base of Islamic capital market in Malaysia. It can also help to enhance competitiveness of Malaysian Islamic capital market by attracting global Islamic investors who wish to diversify their investment portfolio which are Shariah compliant. Islamic REITs regulation was outlined in the Guidelines for Islamic REITs issued on 21st November 2005 by Securities Commission. (Securities Commission,2005).

              The Guidelines were introduced to facilitate the development of new Islamic capital market products, making Malaysia the first jurisdiction in the global Islamic financial sector to issue such guidelines and setting a global benchmark for the development of Islamic REITs. The Guidelines essentially stipulate Shariah compliance criteria to guide management companies in their activities relating to an Islamic REITs, including the types of Shariah permissible and non-permissible rental and investment activities for such fund. Islam prohibited Muslim from investing in properties whose tenants sell alcohol, pork or allo

Effect of Policy on the UK Commercial Property Sector

This research project intends to assess and critically analyse what the impact, whether positive or negative. ‘The Code for Leasing Business Premises in England and Wales 2007’, has had on the commercial property sector from the standpoint of both the landlords and the tenants. It is designed, using primary research to aid the Government in assessing the level of success the Code has had and whether legislation is required to further enforce the protection of small business tenants. It is an interesting topic as the Government has sought to promote greater choice and flexibility in the property and leasing market for some time, but has been unsuccessful, also due to the fact that there are still very few reviews on the topic. The research, undertaken in July 2009 involves an investigation into leasing practice by small business tenants and their landlords, accompanied by secondary research.

  • Structure of the Dissertation:

Chapter 1: Introduction to the subject matter; containing the hypothesis, as well as the goals and objectives of the research.

Chapter 2: Literature Review; sets out to critically analyse the current literature published on the subject and understand currently established views on the topic. A gap in the knowledge is also identified in the existing published literature.

Chapter 3: Research Methodology; provides the methods and an explanation of them, that were used for primary and secondary research in this dissertation.

Chapter 4:Research and Analysis; questionnaires and surveys presented in tables and graphs along with their analysis. Interviews unable to be quantified are scrutinized and compared in full.

Chapter 5: Conclusion; compares the research with the hypothesis. Deducing its limitations and reliability, as well as whom these conclusions will impact, and any potential additional research that could be carried out.

  • Hypothesis:

The introduction of ‘The Code for Leasing Business Premises in England and Wales 2007’ has had no influence upon small business properties and their tenants and as a result was unjustifiable.

  • Context and Background information:

‘The Code for Leasing Business Premises in England and Wales 2007’ was launched by Yvette Cooper, then Minister for Housing and Planning, on the 28th of March 2007. It set out some key recommendations to those taking or granting new or renewed leases.

The code itself comprises of three sections:

  • For the Landlord; a 10 point requirement guide in order for their lease to be compliant.
  • For the Tenant; an explanation of the terms and 37 specific tips.
  • A Model Heads of Terms, made available online.

‘The Code for Leasing Business Premises in England and Wales 2007’ is the result of collaboration between commercial property professionals and industry bodies representing both owners (Landlords) and occupiers (Tenants).

These include such members as the Association of British Insurers, the British council for offices, the British Property Federation (BPF), the British Retail Consortium, the Federation of small Businesses, The Royal Institution of Chartered Surveyors (RICS), The Law Society of England and Wales, and the Department for Communities and Local Government. It replaced the previous embodiment of the Code, published in April 2002.

The Code is voluntary so occupiers should be aware that not all Landlords will choose to offer Code-compliant leases. The Government has felt the need to promote the Code with a continual threat of legislation if it is not adopted this time by the property industry. However the Government takes a keen interest in ensuring the property industry complies with this voluntary Code.

Larger business operators are expected to conform to the Code as they have the resources to employ property professionals to act on their behalf. The Code appears to be more aimed at small business tenants seeking to offer guidelines, promoting fairness in commercial leases and aiming to protect small businesses, by ensuring they have the information available to negotiate the most suitable deal.

  • Goals and objectives:

Objective One: To investigate small business tenants. A number of questions will be put forward in order to gain information into areas such as, lease terms, tenant satisfaction, and tenant awareness of ‘The Code for Leasing Business Premises in England and Wales 2007’.

Objective Two: To investigate landlords, how they operate with regard to small business tenants, and what is their view is on ‘The Code for Leasing Business Premises in England and Wales 2007’.

Objective Three: To gain extensive knowledge into the views of the Chartered Surveyors of The Code, and how The Code for Leasing Business Premises in England and Wales 2007 affects their decisions when advising a client.

Objective Four: To assess the primary research gained in objectives One, Two and Three, and discover how, or if decisions made by a chartered surveyor could indirectly affect a small business tenant.

Ultimately the aim of this research is to establish that the introduction of ‘The Code for Leasing Business Premises in England and Wales 2007’ has had no influence upon small business properties and their tenants and as a result was unjustifiable. While the existing literature discusses the changes in the relatively new Code, there is little information regarding its actual impact upon the industry. Due to the little research done on the new 2007 lease code, this document is intended to gain background information and research on lease practice in the UK, using the Island of Portsea and surrounding areas to determine the amount of business properties and their tenants that have been affected. The only published document comparable to this research is applied to the previous 2002 code and is therefore now outdated.

By gathering data using interviews, questionnaires, and exploring further information written on the topic in journals and articles, my aim is to gather sufficient evidence to establish whether my hypothesis is true or false. It is hoped that the research methodology set out in chapter three is adequate enough so as to create valuable research, which until now has not been documented.

Chapter 2.Literature Review:

  • Introduction

A literature review sets out to critically analyse the current literature published on the subject and understand currently established views on the topic. Secondary research also provides direction to the primary research helping to identify further any unanswered questions.

In order to understand the subject, one must first acquire an understanding of the historical nature of business leases in the UK, and why there appears to be a need for market intervention through lease codes.

Lease Structure within the UK and its’ progression.

  • Historical Lease Length:

For the purpose of this dissertation, it is necessary to understand the historical nature of a business lease, how they are changing, and what normality in the current marketplace is.

The “institutional lease” also known as the 25 year FRI (full repairing and insuring) lease with upward only rent reviews was standard issue through the 1970’s and 1980’s. The introduction of more volatile economic conditions led to a change as the longevity of the leases was deemed unrealistic (Lizieri, C., Gibson, V., Crosby, N., Ward, C., 1998). This type of lease has also been described as the “backbone of property investment” (Hamilton, M. Cheng Lim, L. McCluskey, W., 2006).

Whilst the economic climate began to recover in 1995, “the expectation would have been that a recovery in the economy and the property market would precipitate a return to the bargaining strengths of landlords and tenants prior to the recession and a return to the terms of occupation which prevailed at that time” (Hamilton, M. Cheng Lim, L. McCluskey, W., 2006). However there was a contrasting view to this expectation and a number of reasons are given (Crosby, N., Gibson, V., Murdoch, S., 2002). Firstly, tenants who, after being introduced to more flexible terms were unwilling to return to the “institutional lease”. Secondly, new accounts procedures forced tenants to show leases on their balance sheet as a liability and therefore highlighted the fact that longer leases financially burdened the tenant in many cases.

Research was conducted in 2006 that showed that occupiers are still shifting toward shorter leases in order to prevent themselves from being overexposed to risk. Shorter leases “tend to meet the needs of occupiers functioning in a rapidly changing economic environment” (Hamilton, M. Cheng Lim, L. McCluskey, W., 2006). 10.93 years was found to be the average lease length from January 2001 to March 2004, among 106 office leases taken in Birmingham, London, Manchester and Belfast. This would appear to prove a large departure from the “institutional lease”.

However, this research does have its limitations. It remains unclear how large the offices used for the survey are. Larger offices are more likely to have tenants that require longer leases, mainly to justify for writing off fit-out and relocation costs (Dickenson, March 2007). If this is applied to this dissertation for example, the focus of the Code for Leasing Business Premises in England and Wales 2007 is upon small business properties and their tenants who are unlikely to have large fit-out costs.

  • Upwards-Only Rent Reviews (UORRs):

The UORR is A clause in a lease wherein at a defined given point a rent review will occur. When this arises the rent will either be fixed at either the current rent passing or the open market value, whichever is the highest. As a lease becomes shorter in length, any fluctuations in market conditions are less likely to affect corporate liability. Therefore the lease rent review clauses become increasingly insignificant. A survey conducted in June 2005 by the ODPM (Office of the Deputy Prime Minister) came to conclusion that they had “strongly polarised views about whether or not the Government should legislate against UORRs.” (Office of the Deputy Prime Minister, June 2005) The government has been considering a ban on UORRs for some time but has still not felt the need to act. A further survey conducted in 2007 by GVA Grimley and the CBI focused on the opinions of corporate tenants. “The survey returned only a small majority (57%) in favour of banning them (Cooke, July 2007). Cooke continues to comment that firstly this is not a large enough majority to consider a ban, and secondly, the size and sector spread of the survey was significant and there is a recommendation of further research. Any moves to remove UORRs will have a major effect on the security as property as an investment. Cooke’s view is that as any legislation is unlikely to be retrospective, and therefore a two stage system will be in place, “corporate occupiers would not reap any benefit for some time”. (Cooke, July 2007).

  • Contingent Liability:

“There was a strong vote in favour of removing contingent liability, with 83% voting for its abolition” (Cooke, July 2007). This high figure suggests that many business occupiers are despondent with their current leases; however they are not forced to sign a lease with this agreement and as the research shows tenants are aware of the liability but appear to do nothing about it.

It should be noted that the size of corporate tenants questioned in the research conducted by GVA Grimley is unknown and therefore may offer a poor sample of information for what is required in my research. The Code is positioned to aid smaller tenants who often are unable to afford professional property services. Cooke describes his opinion that “corporate occupiers regard it as inequitable that, having assigned a lease to a third party and having received the landlord’s approval to the transaction, they are required to step back in because of the “failure” of the assignee several years later”. (Cooke, July 2007) If this is a commonplace problem in the market, then this certainly gives good grounds for a new code.

2002 Code of Practice for Commercial Leases (E2):

The second edition of the Code of Practice for Leases in England and Wales was published in 2002. Philip Freedman, one of the co-contributors to the 2007 code commented that “Although it was felt there had been a significant move toward shorter leases, and lease terms had become more flexible, small business tenants were still poorly informed about property matters and landlords were not offering tenants sufficiently flexible lease terms to match their business needs”(Freedman, 2006). Freedman continues to mention that the government was unsatisfied with the continued prominence of upward only rent reviews (UORRs) in longer leases, and was considering outlawing them.

The Code introduced in 2002 was very different from its predecessor from 1995 that it replaced. There were no objectives or aims set out in the Code, instead, ten key recommendations to business leases were listed. The first three were to promote open negotiation between parties, and to recommend financial advice on costs of occupation. The other seven points cover particular aspects of a commercial lease (Neil Crosby et al. (2005).

The paper “Monitoring the 2002 Code of Practice for Commercial Leases”, co-written by Neil Crosby at Reading University for the UK government was designed to measure in detail the impact of the 2002 Code. It is similar to my piece of research, although it is now outdated and obsolete for professional consultation. It does however show key research that provides evidence that the 2002 Code was unsuccessful and therefore required change. An interview survey was carried out with an extensive number of chartered surveyors, and also with solicitors involved with conveyance and lease contract negotiation.

The perception of property professionals acting for clients in 2005 was noted as follows. Firstly, virtually all interviewees were aware of the 2002 code. Secondly it is clear that larger and institutional landlords are more likely to have knowledge of the code and smaller landlords may not. Thirdly, tenants are perceived to have no knowledge of the code unless they are large tenants with direct access to professional property services advice. The conclusion is that “Most consider that the Code is having no influence at all on lease negotiations, although some of the agent interviewees regard it as having some small, indirect, influence. Only two interviewees, one surveyor and one solicitor, are actively and regularly using the Code when negotiating on behalf of tenants.”

The paper concludes that there is the perception among large commercial tenants that the lease structure system is unsatisfactory in the UK, even if they are unaware of the Code. International tenants appear to be more dissatisfied than their UK counterparts. The main reasons cited for dissatisfaction are the lease lengths, and the tenant’s lack of break clauses.

The research methods used in this paper hold credit as the results were a catalyst for a code reform. It is highlighted that the Code is underperforming, and holds no or very little influence. The paper has been useful in developing my hypothesis as it gives a benchmark for success for the 2007 Code.

  • “The Last Chance to Get Things Right”:

The article titled “the last chance to get things right” written by Philip Freedman, comments on the shortcomings of the 2002 Code and gives specific direction as to changes that should be implemented in the new Code. The shortcomings are extremely valuable to my research because it shows direct areas in which the 2002 Code has been considered to fail and these areas should be focused upon when analysing the level of success of the 2007 Code.

Firstly, Freedman sights that restrictions on subletting and assignments have not been relaxed in accordance with the Code. Landlords, familiar with the landlord and tenant act 1995, had in recent years been imposing detailed restrictions on assignments, most notable with the introduction of required authorised guarantee agreements (AGAs). Tenants under such agreements are limited in their possibilities for assignment as it is difficult to find a sufficient tenant. Furthermore, the liability still remains in an event that an assignee defaults on the lease payments. His views are backed up by the research by the 2005 report conducted at Reading University. This research found that most leases that had the option for assignment automatically required the tenant to enter into an AGA.

Secondly, “between the period of 2002 and 2005, the courts upheld a number of landlords’ rights to impose strict enforcement on lease clauses that require subletting to conform to specific requirements on rent or other terms”(Freedman,2006). Freedman sights the case Allied Dunbar Assurance PLC V Homebase LTD [2002]. This would suggest that the courts are not working in unison with the views held by the Government that businesses require further protection from landlords.

Freedman concludes, indicating that this is the last chance for the industry. A study into whether the new Code has influence or not would seem wholly relevant as it would provide knowledge on whether this “last chance” has been successful or not.

Code for Leasing Business Premises in England and Wales 2007:

After Yvette Cooper introduced the Code in March 2007, Geoff Le Pard considered the contents of the new Code. “The new Code is more concise than the 2002 version. It is written in plain English and provides more authoritative guidance on lease terms” (Le Pard (2007).

The article, from which the quote above is taken, was released 3 days after the Code was introduced. While this is time to provide commentary on the new aspects of the Code, it is unable to provide any reliable prediction as to how this will affect the market in the long run.

New aspects of interest that are assessed include firstly pricing options and rent reviews. “Under the 2007 Code, landlords must state whether a choice of lease terms is available and propose rents for different lease terms” (Le Pard (2007).

Secondly, restrictions on assignment are discussed. “One of the government’s principle concerns is the inflexible assignment and subletting provisions in leases” (Le Pard (2007). The article continues by commenting that the Code only allows the provision of an AGA agreement, established problem of the 2002 Code, when the assigned tenant is of a lower financial standing than the outgoing tenant.

Thirdly Le Pard comments that the new Code insists Break Clauses should “not be prevented by conditions that effectively make the break inoperable” (Le Pard (2007).

Certainly the three features of the 2007 Code that are described by Geoff Le Pard can be tested using primary research as to their influence.

  • “A Code that Lacks Strength”:

“The reach of the new commercial lease code will be limited by the ability of landlords to opt out selectively” (Martin, 2007). In this article, John Martin explains that the government and BPF believe that landlords who subscribe to the Commercial Landlords Accreditation Scheme (CLAS) will gain marketing benefits. Part of the scheme involves the landlords abiding by the 2007 commercial lease code (landlord code). If rules are broken then private and public reprimand can occur however, the landlord code value is “watered down” in the fact that landlords can opt out of any specific requirements of the Code (subject to explanation). The extent to which landlords sign to the CLAS is not described, however is supports the view that landlords do not want to adopt the Code.

Martin also has an interesting view that the new guidance on assignments “appears to be an attempt to revert to the pre-1996 position, without re-instating the concept of privity of contract” (Martin 2007).

The article is however written with an assumption that the Code will be endorsed by property professional and therefore will spread throughout the market quickly.

Gap in the Knowledge:

As previously mentioned, there is a wealth of information published commenting on the Code for Leasing Business Premises in England and Wales 2007. What is unknown is the influence this code is having on the industry if at all. Considering the Code is thought to be the last chance for reform prior to legislation, its performance should be reviewed to show whether legislation is necessary or not. After reviewing the literature in this chapter, a conclusion has been drawn that the Code is unnecessary. There is not sufficient research to prove this and there is therefore a gap in the knowledge. The next chapter sets out the methods in which the hypothesis in Chapter 1 will be tested.

Introduction:

This research was designed to test this hypothesis;

The introduction of The Code for Leasing Business Premises in England and Wales 2007 has improved the position of a tenant when negotiating a new lease.

This chapter discusses the research methods applied and ultimately lead to a comprehensive conclusion that will either reject or confirm the hypothesis.

Research Methods:

Traditionally, there are two different types of research. These are Quantitative research and qualitative research. Miles & Huberman (1994).

  • Quantitative Research:

Quantitative Research is normally presented in Data, usually in the form of numbers and statistics.

“There’s no such thing as qualitative data. Everything is either 1 or 0” (Fred Kerlinger).

The aim is to classify what statistics are important, count them and construct statistical models. One can then explain what is observed. Fred Kerlinger considers all research can be ultimately defined as quantitative as one could argue that all information can be displayed through binary (yes or no) questions and answers.

  • Qualitative Research:

Qualitative research is based upon alternatives to statistical data such as values and opinions. Donald Campbell holds the view that all research must stem from an initial qualitative theory.

“All research ultimately has a qualitative grounding” (Donald Campbell)

It can be extremely useful when there is little or no previous research on a topic, as it can unearth new views and theories on a subject. Donald Campbell considers all research stems from an initial qualitative study.

Research Strategy:

  • Secondary Research:

This type of research relies on the information and research submitted by others. The advantages and disadvantages are shown in table 3.1 above. Before writing this report, many books, internet articles, journals magazine articles were consulted so a thorough understanding of the subject was known. It should be noted that as the Code in question, The Code for Leasing Business Premises in England and Wales 2007, was only introduced at the end of April in 2007 there is therefore limited published material on the subject.

  • Literature Review:

The literature used in Chapter 2 for the review is a form of secondary research, and while it shows the current knowledge on a topic, much of it is outdated and therefore unreliable. The literature review also highlighted the lack of material published regarding the lease codes in the UK. There are a number of magazine articles but there is only one academic report (Crosby et al. (2005)) that holds any significant value, but as stated it is outdated. Once the gap in the knowledge was identified from the literature review, it gave direction for a number of research questions to use in my primary research.

  • Primary Research:

This is research that compounds new information. The following two types of primary research were used by my study:-

  • Small Business Tenant Questionnaire.
  • Landlord Questionnaire.
  • Semi-structured Interview with Chartered Surveyors.

Tenant and Landlord Questionnaires:

  • Target Audience:

The first stage of primary research involved two separate questionnaire studies firstly to tenants, and secondly to landlords. The questions aimed at the subjects were influenced by the report from Reading University “Monitoring the 2002 Code of Practice for Commercial Leases” (Crosby et al. (2005)). Questions were asked with a final goal of contributing to the objectives and aims of the report and testing the validity of the hypothesis.

The questionnaire provides an opportunity to understand the direct influence of the Code for Leasing Business Premises in England and Wales 2007 on tenants and landlords.

Questionnaires were completed in either of two ways. It was established that it would be far easier to gain responses from landlords if it was via email and therefore this is how the 20 landlords were contacted and how they gave response. With regard to the tenant questionnaire, it was decided that a questionnaire would be delivered to a number of tenants. After two days, these would be collected and any uncompleted questionnaires would not be counted. A total of 30 business tenants were visited. Due to the data protection act, names of tenants or landlords remain anonymous and cover notes were addressed to the “Manager”.

  • Sample:

Due to the large number of tenants and landlords in England and Wales, it is necessary to sample the respondents. The sample method used is a form of “random” and “cluster sampling” combined. Normal cluster samples are used when the subject research matter is too large to measure. Normally certain areas would be subject to research instead of the whole country for example. Often in cluster sampling, “the total population is divided into these groups (or clusters) and a sample of the groups is selected” (Wikipedia, 2008). In my research, this was further randomised down into sample of particular clusters. Areas used for the research were Windsor, Bracknell and Reading. It was considered that 30 tenants and 12 landlords would be a sufficient sample to gain the required information without mak ng the research excessively impractical.

  • Design and Content:

Each of the two questionnaires were designed to be as clear as possible for the target individuals, and they also incorporate layman wording as to ensure each question is understood fully. The majority of questions asked utilised a multiple choice answer system. This enabled each paper to be completed with ease and also provide comparable data between different questionnaires. Copies of both Questionnaires including a covering letter for each questionnaire are included in Appendix B and C respectively.

  • Pilot:

It was felt necessary for a pilot copy of each questionnaire to be reviewed by a property professional prior to conduction of the survey. This was done for a number of reasons. Firstly the design of the questionnaire is reviewed to ensure it is easy to comprehend. Secondly, the wording is reviewed and changed if necessary. Thirdly organisation and the number of questions are reviewed. The pilot questionnaires were sent to a property professional Nigel Dight (Leslie G. Dight and Partners). It was decided after the pilot that a universal “do you have any other comments to add”, would be incorporated as a final question. This gives the opportunity for landlords or tenants in the subject research to add any qualitative information they feel important to the subject.

  • Response Rate:

Before each email was sent to landlords, a telephone call was made to ensure they were comfortable with the questionnaire. This ensured a high response rate. A covering letter (viewable in Appendix B) was also sent to emphasise the importance of the answers and how they help the research project. A response rate of 75% was achieved which was viewed as a success. A much lower response rate was expected from the tenant questionnaires; however, the 60% achieved was largely viewed as a success. It was expected to that ten respondents from each questionnaire would be achieved however this was exceeded. After this initial response it was decided therefore that no new respondents needed to be found as both questionnaires had exceeded response rate expectancy.

Semi-structured Interview:

  • Target Audience:

Interviews were carried out with chartered surveyors who have extensive current and previous experience in both tenant and landlord representation during lease negotiations. It is important that each interviewee has experience of the market over the last twenty years in order to have a comprehensive view of how the market has changed, and how this has affected tenants. Appendix D gives a list of interview candidates. A semi-structured interview technique was used to gather information from chartered surveyors because they are likely to have a wealth of experience and knowledge on the topic. The interview provides the opportunity to show the indirect impact of the Code for Leasing Business Premises in England and Wales 2007 because, unlike the questionnaires, the interviewed surveyors are more likely to have a broader understanding of the mechanisms within the market. If the code is found to indirectly affect a business lease tenant, the surveyor is far more likely indicate this than the tenant themselves.

  • Sample:

Due to the large number of chartered surveyors in the UK it is not possible to interview them all. A random sample method is used to find suitable candidates for the interview process. It is also important the prospective candidates are vetted prior to the interview to ensure they have the relevant experience to answer the questions. Although only a small number of interviews took place, an attempt to provide a full spectrum of surveyors from the marketplace was achieved. One of the interviewees acts on behalf of large corporate clients, while another acts on behalf of smaller clients for example. It was viewed that only a small number of samples would be required as a predicted response rate was a high percentage.

  • Design and Content:

Appendix D includes a list of outline questions that should be posted to interviewees. Although only a guideline, these questions were designed to gain the core information required from the interview. In practice, further questions and discussions took place during the interview. Compared with the questionnaires, this provides further in depth answers and opinions. The estimated time of each interview was intended to be around 15 minutes. This was firstly conceived to be enough time to gain the required information. Secondly it was not so long as to discourage any prospective interviewees from taking part. In practice the interviews lasted for around 25 minutes, due to the expansion of the core questions, however this did not cause a problem. A full transcript of each interview can be viewed in appendix E. Two of the interviews were carried out via telephone interview as this provided the easiest was to lease with surveyors at some distance. One interview was carried out in person due to the close proximity of their office. The interview in person proved to be more successful as the interviewee seemed more focused on the questions.

  • Response Rate:

The response rate was 60% which was considered poor under the circumstances. A small number of surveyors were contacted with the initial view that all would provide an interview. The response rate did however fall between 60% and 100% which wa

Analysis of the Dutch Healthcare System Real Estate

Chapter 2: Hospitals, corporate real estate management and alternative real estate financing structures

Healthcare systems across the globe are under continuous reform. Thus, it is important to note that healthcare systems are still evolving. Moreover, in Europe a distinction is made between so-called Bismarck “mixed” and Beveridge healthcare models. Bismarck systems are based on social insurance, and characterized by a multitude of insurance organizations, who are organizationally independent of public and private healthcare providers. Examples are such as in France, the Netherlands and Germany (“Krankenkassen”).

In Beveridge systems, however, financing and provision are handled within one organizational system and based on taxation. This implies healthcare financing bodies and providers are completely or partially within one organization, such as the National Health Service (NHS) in the UK and Spain (Lameire, et al. 1999; Finfacts, 2007). Throughout history, healthcare systems across the world have evolved from Bismarck into Beveridge systems and vice versa. Usually, such reforms are a bone of contention.

A recent example is the highly controversial debate in US politics on reform of the American healthcare system, which is unique in its application of the Private Insurance model (Lameire, et al. 1999). Democrats have long called for a universal health insurance program, which involves the expansion of coverage and restricting the power of insurance companies. Proponents argue that health insurance should be affordable and accessible to all, while opponents (mainly Republicans) fear too large a role of the government and the use of tax money to finance the – arguably – enormous costs involved. Both parties seem to agree that the power of insurance companies should be restricted by banning underwriting practices that prevent many Americans from obtaining affordable health insurance.

However, though U.S. president Obama has praised various aspects of the Dutch social security-based (Bismarck) healthcare system, a similar evolution of the American healthcare system yet has to commence (NY Times, 2009).

This section begins with a brief historic overview of the Dutch hospital (or cure) sector, with a focus on its evolution. Second, the interdependencies between healthcare real estate, (strategic) corporate real estate management, and alternative real estate financing structures will be elaborated upon by using corporate real estate management (CREM) theory and comparing various sources from academic literature.

These are intertwined since healthcare heavily depends on real estate as a resource in fulfilling its core business activity. By opting for alternative ways to finance real estate, hospitals are able to free up additional capital to support their clinical activities. As the Dutch healthcare system currently is under reform and hospitals become responsible for real estate investments themselves, they are under increasing pressure to consider more cost-efficient options and enhance their competitive position. Alternative real estate financing structures such as public-private partnerships, where hospitals profit from the knowledge and experience of private sector parties through various partnership agreements, could provide a alternative feasible alternative here to more traditional real estate financing structures. For example, hospitals could opt for a sale-lease-back agreement, where hospital real estate is sold to a private party and leased-back to the hospital for an annual fee.

By analyzing the above, this theory and literature review will provide the reader with an answer to the following sub-questions:

  1. How are Dutch hospitals regulated and financed?
  2. How can corporate real estate management add value to hospital real estate?
  3. How do alternative real estate financing structures relate to hospital real estate?

The Dutch hospital sector

The origins of healthcare in the Netherlands can be traced mainly to the activities of voluntary organizations, which often provided healthcare on a charitable base.

These organizations used to be run mainly on religious or ideological foundations, resulting in the creation of healthcare facilities with a Protestant, Roman Catholic, Jewish or humanistic foundation (Folter, 2002).

The Dutch healthcare tradition reflects the changing relationship between the government and voluntary organizations. Dutch hospitals largely originated from private and often charitable initiatives; virtually all are non-profit and most are still private organizations. However, today they are no longer organized along denominational lines.

Though private ownership predominates, the Dutch government heavily regulates the healthcare system. In the postwar era of the 1950s, there was a focus on hospital construction, part of the broader effort to rebuild the country. In 1971, an extensive planning system was undertaken under the Hospital Provision Act (WZV) to regulate hospital capacity, the main motive being that many people felt hospitals were too concentrated in the urban areas and too few were located in other parts of the country (Den Exter, et al. 2004).

Planning, regulation and management

In the 1960s and 1970s, the expansion of health technology and healthcare resulted

in a steep increase in health care costs. The main cause of the cost increase was attributed to the building of new hospitals and healthcare institutions.

The Hospital Provision Act (WZV) of 1971 became the Dutch government’s most important hospital planning tool, enabling the government to regulate construction of all healthcare institutions. The responsibility for its implementation was allocated to the provincial health authorities.

The overarching goal of the WZV was to regulate the supply and promote the efficiency of hospital care. Hospitals were not to be constructed or renovated without successfully passing a declaration and licensing process. Approval of the building project rested on a detailed plan for each hospital service affected in a specific geographic region, which included a description of the existing service capacity, the suggested change of capacity, and a schedule to complete the project.

The planning process began with the issuance of an “instruction” from the Minister of Health, Welfare and Sport to the provincial government. The instruction described the categories of hospital facilities for which plans were to be developed, the geographical region covered, and the deadline to complete this. Provincial governments considered a number of regulations and guidelines in the process. Regulations related to the planning process and guidelines to the content of the plan.

Many stakeholders were involved in the formation of regulations, including hospitals, patients and consumer organizations, local authorities, and insurance companies.

In the initial stage, the provincial government prepared a draft plan. This plan included: an inventory of existing capacities; an evaluation of the existing situation in terms of shortages and weaknesses; a description of construction, renovation and expansion proposals; and an implementation plan and time schedule.

Subsequently, the draft was forwarded to the health minister for approval. The health minister, after counseling the Hospital Provision Board (CBZ), determined whether or not the draft was acceptable. The draft plan formed the foundation for the issuance of so-called acknowledgements, which allowed hospitals to receive reimbursement for services from health insurers.

The drawbacks of the initial hospital planning process under the Hospital Provision Act (WZV) were its complexity and lack of flexibility. Therefore, in January 2000, in order to improve the planning process, a new Act, the Special Medical Procedures Act (WBMV), came into existence. The focus of this Act was on quality of care rather than cost containment and aimed at promoting healthcare with maximum quality and minimum risk to patients at affordable cost (Den Exter et al., 2004).

Decentralization

According to Den Exter et al., in the Netherlands policy traditionally has been prepared and implemented by a massive “neocorporate bureaucracy”, uniting government agencies, quasi-governmental organizations (the advisory and executive bodies), suppliers and providers in the private sector, and insurance companies. This national body has a significant degree of control over decisions regarding the number and distribution of hospital beds and specialist places, and on investment decisions and management costs in health care.

In the 1970s, centralized government coordination and planning became the leading principle in the Dutch healthcare system. However, the 1974 policy paper Structuring health care (Structuurnota Gezondheidszorg), contained proposals for decentralized administration by regional and local authorities (Second Chamber of Parliament, 1974). In 1986, the coalition government departed from the centralized model by undertaking major reforms, especially in the field of social health insurance.

The integration of different insurance schemes into one social insurance for all Dutch citizens (with largely income-related contributions) was a bone of contention.

The aim was to increase solidarity in healthcare financing.

Under these reforms, all insurance companies would function as independent and risk-bearing insurers and compete for insured patients under the same regulations.

A central fund (“centrale kas”) was to provide budgets for all the insurers. A key issue in the reforms was the shift of the insurance risk from the public funding system to the individual insurance plan, justified by the “less government, more market” trend.

The shift of insurance risk involved a policy of transferring regulating competencies from the collective to the private sector, such as providers and insurance companies.

In the Netherlands, this policy is called “functional decentralization”. This has mainly occurred in the cure-sector, which entails acute care and both specialist and general medicine. By means of negotiations and contracts, an increasing number of health insurers and providers have become important determinants in shaping and interpreting healthcare today, while the government and administrative agencies used to assume these roles in the past. This is emphasized by the new role assumed by medical specialists in hospital care. For example, they have acquired an independent coordinating position versus both hospital management and sickness funds (Scholten and van der Grinten, 1998).

Hospital budget reforms

In the Netherlands, today all hospitals and other healthcare institutions are required to have an overall annual budget. This is in line with the government’s cost-containment policy. If the hospital exceeds its budget, there is no possibility of recalculation or compensation. Specialist fees are an exception to this overall hospital budget. Below follows an overview of the budget reforms that have taken place up until 2009.

Function-directed budgeting (1988 – 2000)

The old budget system, which was in use since 1988, was a function-directed budget system. The budget was divided in four cost components: location costs, fixed costs, semi-fixed costs, and variable costs.

Location costs concern infrastructure, for example buildings and equipment including depreciation and interest. In the old budget system, these investments required approval by the health minister under the Hospital Provision Act (WZV). Second, fixed costs are costs that do not generally vary with the activity volume. For example, the number of people served by a hospital in the region. Thirdly, semi-fixed costs are not affected by the scale of production of a hospital in the short run. These are capacity-based costs, and include the number of beds and specialist units. Finally, variable costs are directly related to the activity volume or the production (“production units”) of the hospital.

Parameters for variable costs include admissions, outpatient visits, nursing days, day care and day treatments (Den Exter et al., 2004).

In the old system, the hospital budget was determined as follows:

  • Number of persons in service area (x tariff)
  • + number of licensed hospital beds (x tariff)
  • + number of licensed specialist units (x tariff)
  • + negotiated volumes of production units, for example hospital admissions (x tariff), inpatient days (x tariff), first outpatient contacts (x tariff), day surgery (x tariff) and special treatments (x tariff)

Tariffs varied with hospital size, implying larger hospitals were allocated higher tariffs than smaller hospitals.

In addition, hospitals were allocated capital expense budgets. For example, rebuilding projects and new hospital construction projects were covered by a 100% mark-up applied for 50 years. This implies payment was guaranteed for 50 years through a mark-up in the day rate. As a result, hospitals were not exposed to financial risk regarding major capital expenses. Further, hospitals received a standardized budget for small investments, such as maintenance. These investments did not require the approval of the health minister.

Performance-driven budgeting (2000 – 2005)

Until 2000, hospitals still received the full budget when it produced less inpatient days than estimated under the principle budget=budget. However, this was changed into a performance-driven payment system implying hospitals would get paid less if they would produce less inpatient days than agreed upon with health insurers. The underlying notion of this change was to increase hospital production, in order to put a halt to waiting lists.

However, this transition brought a number of new problems along:

  • Hospital budgets were unable to keep up with the increase in demand for hospital care. While patients paid insurance, they were unable to benefit from hospital service directly because of waiting lists.
  • The admissions, inpatient days and day surgery tariffs used to set the budget proved completely artificial, not reflecting true costs.
  • Incentives for efficiency were weak.
  • The budgeting system did not stimulate hospitals to inform insurers and patients about their performance. This is a politically sensitive issue, as hospitals received extra money to combat waiting lists but were reluctant to explain for what goals they used this money.

DBC-budgeting and dot (2005 – present)

Therefore, a new gradual transition is currently taking place to a Diagnosebehandelings-combinatie (Diagnosis Treatment Combination, DBC) financing system. The DBC system has the following implications: a transition to output pricing with defined and priced patient-treatment categories; location costs remain fixed and all other maintenance costs will be integrated into the location cost center of hospital budgets (set by the College Tarieven Gezondheidszorg, CTG, Healthcare Tariffs Council); and hospitals are contracted by sickness funds based on patient-treatment categories. The main notion is that hospitals are reimbursed for the costs they incur resulting from medical treatments. The DBC-A segment tariffs (acute care) remains government regulated (through the NZa, Dutch Healthcare Authority) and concerns acute care, whereas hospitals are largely free to negotiate tariffs with healthcare insurers in the DBC-B-segment (non-acute care) in an effort to promote market forces. Currently, about 34% of the DBCs is allocated to the B-segment; the Dutch Health Ministry aims to increase this proportion to 50-60% by 2011 (Van Poucke, 2009).

The DBC system is comparable to the DRG (Diagnosis Related Group) system used abroad. However, there are a number of differences:

  • DRGs are coded at the beginning of the treatment, while DBCs are coded afterwards.
  • A patient can be coded in more than one DBC.
  • In the DBC system the coding is not done by special personnel but by a medical specialist.
  • The physician salary is included in the DBC, giving physicians an incentive for “upcoding”.

In the DBC system, more flexibility is granted to parties that negotiate at the local level on production, number of treatments, and number of specialists. Furthermore, efforts are being made to integrate the fee-for-service system for specialists and the hospital budget system into a single integrated budget (Den Exter 2004).

However, since the system is still in early development, the effects of DBC financing on hospitals are still ambiguous. As a result, improvements have been proposed which will be implemented as of January 1 2011 under the DOT (DBCs Op weg naar Transparantie, DBCs on the road to Transparency). This implies that the 100,000 DBC products will be sized down to only 3,000 in order to increase transparency for the patient, healthcare practitioners and healthcare insurers (DBC Onderhoud, 2009).

Real estate investment reforms

Until 2008, the Dutch healthcare system applied a publicly supported healthcare real estate budget system. However, since 2008, Dutch healthcare institutions have become financially responsible for the return and risks of their real estate investments (see Chapter 5: Real estate investments).

Moreover, the Dutch healthcare system is changing toward a regulated market system with increased competition between healthcare providers. According to Van der Zwart et al. (2009), these developments are likely to change the way healthcare institutions will manage and finance their real estate, the location choices they make and the building typology they choose. Furthermore, real estate is becoming an increasingly strategic “fifth” source of profitability and overall performance, similar to capital, human resources, information and technology (see figure 2.1). For hospitals, considering and using real estate as a strategic production asset can reap added value, as will be explained in section 2.2.2.

Financing hospital real estate: from supply-driven to regulated market forces

As health insurers now negotiate quality and quantity agreements with hospitals and patients are broadening their horizons, the importance of an integrated approach to the “product” hospital care. Hospitals should be able to use their real estate as a distinguishing element in attracting customers (the patient). As a result, real estate is being transformed into a strategic resource for hospitals as well and hospital executives are paying growing attention to real estate management, including location management (what to do where), business plans (do investments yield positive returns) and real estate asset valuation. Building plans are based on functional clustering: hospitals divide new buildings into “hotels” (patient rooms), “hot floors” (operating rooms), “offices” (simple treatments, patient consults), and “industrial plants” (medical support/facilitating functions). As hospitals are no longer required to own their real estate assets, some are seeking partners willing to take over some of their real estate management (Windhorst 2006).

The Dutch government used to be in charge of allocating the budget of healthcare real estate investment, but is moving toward a regulated market system to keep healthcare affordable in the future. This deregulation gives healthcare institutions the opportunity to make their own decisions, translating into more individual responsibility and a higher risk exposure of investments. The government no longer guarantees financial support for real estate investments, and thus real estate investments have to be financed by the production and delivery of healthcare services. As a result, the need for competitive advantage will also increase (Van der Zwart, et al., 2009).

The Dutch government used to apply a strict approval system in the former real estate budget system in order to regulate the capacity and costs of hospital health care. All initiatives to build, renovate or demolish a hospital building were evaluated “in terms of their fit with a regulated overall capacity per service area, square meter guidelines per hospital bed and per function, and a maximum standard of costs per square meter” (Van der Zwart, et al., 2009: 2). The initiatives were approved by the Minister of Health, Welfare and Sports, who was advised by the Netherlands Board for Healthcare Institutions. The real estate capital costs (depreciation, rent, maintenance costs and so on) were guaranteed by the government. The healthcare provider’s real estate budget was independent of the production of healthcare services.

According to Van der Zwart et al., hospitals did not bear any responsibility for the risks of their real estate investments in the old system. Furthermore, they were not responsible for the running costs and a possible deficit if production decreased. As a result, hospitals attempted to obtain the maximum amount of square meters and were not encouraged to be either cost efficient or cost effective. In March 2005, the Dutch Minister of Health, Welfare and Sports announced the modification of this real estate budget system and the introduction of a healthcare system with regulated market forces (Hoogervorst, 2005). The main goal is to keep healthcare affordable by stimulating competition and, as a result, reduce healthcare costs.

This deregulation provides healthcare institutions with more flexibility in the briefing, design and management of hospital buildings and real estate investments. Similar to the old system, private not-for-profit initiatives are still the main force behind the capacity of hospitals, but in the new system hospitals are themselves responsible for the return on real estate investment and the effects of real estate decisions on utility value, investment costs and running costs. Since January 2008, hospitals have to finance real estate investments and capital costs from their product and service revenues. This implies a switch from a “centrally steered real estate budget system with governmental ex ante testing of building plans and investment proposals … into a performance driven and regulated finance system on the output” (Van der Zwart, 2009: 3).

To ensure a smooth transition, there is a transition phase until 2012 with a standardized and maximized budget for capital costs per m².

This trend will have a strong effect on the briefing, design and management of hospital real estate (Van der Voordt, 2009). Hospitals will get new opportunities while experiencing higher risks at the same time and hospitals will have to aim more at competitive advantage. Furthermore, partnerships with private partners will be more common. According to Fritzsche et al. (2005) and van Hasselt (2005), this transition has a number of implications, as illustrated in table 2.1 and figure 2.1.

Moreover, “organizational changes (e.g. mergers and network organizations), demographic changes (ageing of the population, multicultural diversity), technological developments (e.g. new medical equipment, new installation techniques), fluctuations in the economy and changing views on healthcare and the responsibility of government, healthcare organizations, market players and healthcare consumers play their role, too” (Van der Voort, 2009: 2). As a result of mergers and the growth in hospital functions, hospitals are likely to grow even larger than before. Van der Voordt argues that all these changes affect the healthcare real estate stock and cause a need for new health care real estate management strategies.

Christensen et al. (2000) warn for the entrenched and change-averse nature of healthcare systems. They argue governments and institutions should be more open to business models that may seem to threaten the status quo at first, but will eventually enhance the quality of healthcare for the end-user: the patient. New institutions with “disruptive” business models adapted to new technologies and markets should replace entrenched and old-fashioned institutions. Thus, they conclude that government and healthcare sector leaders should help insurers, regulators, hospitals and health professionals to facilitate disruption instead of preventing it.

Current challenges

The practical implications for hospitals of the current transition to a new healthcare system in terms of capital financing and real estate investments will be further explained in chapter 4 and 5. First, the following section will elaborate on the theoretical foundations of corporate real estate management.

Corporate real estate management

In order to make well considered decisions with regard to new building projects, rebuilding projects and the sale of real estate property, a deep knowledge of the real estate property and the many related internal and external developments is required.

For example, what actions need to be taken in order to eliminate or reduce discrepancies between demand and supply? And how effectively does real estate support the main business processes?

Corporate Real Estate Management is one of the disciplines that addresses such questions. The key issue at stake here is to align the supply (e.g. locations, properties) with the requirements related to the primary process (demand) and the strategic goals of the organization. The overall aim is to create maximum added value for the organization while ensuring a maximum contribution to total organizational performance (Van der Voort, 2009).

Increasingly, (corporate) real estate is becoming a substantial resource for firms and other institutions. For example, firms are looking at real estate to provide both stability and capital growth to their portfolios.

It thus presents an attractive return compared to the volatility in equity prices (DTZ, 2006).

Already in the early 1990s, researchers began to call attention to the largely unrecognized importance of corporate real estate to many businesses. They pointed at the substantial balance sheet value of real estate and the large proportion of operating expenses resulting from real estate services (Roulac, 2001). For example, Veale (1989) concluded corporate space costs account for 10% to 20% of operating expenses or nearly 50% of net operating income.

In their paper, Rediscover your Company’s Real Estate, Zeckhauser and Silverman (1983) estimate corporate real estate accounts for 25 to 40 % of the total assets of the average firm. Many firms underestimate the intrinsic value of their real estate portfolio, even though the magnitude of costs related to owning properties are second only to payroll costs (Veale, 1989). Zeckhauser and Silverman’s survey results mention 7 important steps a firm can take to make more efficient use of its real estate assets. For example, firms should manage real estate responsibly and set achievable goals in order to generate profits from its real estate assets or limit costs. Furthermore, a firm’s choice of real estate activities other than managing property depends on the nature of the business it operates in and the historical record of its real estate portfolio. This implies that firms that more heavily depend on real estate for their business activities might be more actively involved with their property management. Zeckhauser and Silverman conclude that every firm should review and adjust its real estate policies to reconcile operating objectives with real estate values and opportunities, and evaluate the intrinsic value of its property.

Though the return on real estate is generally lower than the return on the core business activity, real estate may provide other forms of added value, such as efficiency and effectiveness of the activities in the firm. Kaplan and Norton’s (1992) balanced score card approach describes the performance of a corporation as being defined by a combination of financial, internal business, customer, and innovation and learning perspectives.

In addition to the financial value of real estate, unique characteristics such as the design of a building transform real estate into an asset that can be difficult to imitate, substitute, or trade. Furthermore, the physical image of a building may function as a marketing tool, attracting attention to a firm’s services. Thus, when buildings reflect the business’ purpose and promote important work relationships they can contribute significantly to corporate strategy and serve to distinguish a firm from its competitors (Krumm & de Vries, 2003).

Strategic corporate real estate management

Roulac (2001), with his Aligning corporation real property with corporate strategy-model, links real estate strategies with sources of competitive advantage.

A corporate business strategy addresses key elements such as customers, employees and processes.

A corporate property strategy affects employee satisfaction, production factor economics, (realized and foregone) business opportunities, risk management decisions and other effects on business value.

Thus, it is crucial in enhancing or inhibiting the company’s expression of its core competency and the extent to which it can realize its core capabilities to their full potential (Roulac, 2001).

The existing scientific research in this field has resulted in the conclusion that it is generally more advantageous for firms to rent, rather than own the real estate they use, enabling them to free up capital to invest in the things they are good at (Brounen and Eichholtz, 2003). The shares of firms who sell their real estate typically outperform the average and firms with large corporate real estate holdings are typically associated with relatively low performance.

However, within the field of real estate finance, little research has been conducted on the effects of alternative real estate financing structures on the performance of non-profit organizations, such as hospitals. Though Eichholtz and Kok (2007) examined the performance effects of alternative real estate financing on the American senior healthcare sector, little is known about the performance of hospitals owned and/or operated through alternative real estate financing structures such as, for example, public private partnerships (PPPs).

In 1993, real estate expert Michael Joroff (1993) expressed the need for a move in real estate management from a purely operational approach to a more strategic one, including a strong emphasis on the role of real estate in achieving corporate goals. According to Joroff, this requires a switch from a day-to-day focus on building management (“manager”) and controlling accommodation costs (“controller”) towards standardized real estate utilization (“trader”), adapting real estate assets to the market (“entrepreneur”), and eventually ensuring strategic real estate decisions contribute to corporate goals (“strategist”). See figure 2.2 below.

An organization often finds itself in a combination of different stages. According to Fritzsche (2005) hospitals still need to make the move to the upper stages. Thus, when hospitals make a transformation to more business-like entities, they will find themselves in the entrepreneur or strategist stage. However, it is debatable whether hospitals should be located in the final stage, as hospitals in essence are non-profit foundations and do not have the same goals and core-business activities as business organizations. This is where the classical debate regarding public versus private provision of a public good (healthcare) enters the arena; this will be discussed further in section 2.3.

The added values of real estate

According to De Jonge (2002), several ways