Competitive advantages created by market strategies and the economic cycle in commercial real estate investment

Economic cycles have a strong impact on the profitability and operations of modern markets. Even commercial real estate investments which have been traditionally considered to produce steady returns with a relatively low volatility have encountered large difficulties especially during the last decade to generate returns which succeed their return expectations. Simultaneously the rapid development of the Finnish commercial real estate investment market has woken up the interest of even increasing amount of investors which has further increased the competition between different investors actively participating in the market notably. A proportion of the investors have managed to perform better than their competitors during different phases of the economic cycle by creating and utilizing so called competitive advantages in relation to their competitors. This master’s thesis focuses on studying the competitive advantages in relation to fluctuations of the economic cycle of different domestic and foreign investors which have been active in the Finnish commercial real estate market between the years 2006 and 2012. This thesis includes a literature review of competitive advantages in general and furthermore applies these theories to commercial real estate investment. Competitive advantages of different investors are observed in relation to the organizations’ internal characteristics and cost efficiencies considering the discounted cash flow analysis which is typically used for valuating various real estate investments. The research’s empirical part studies the transactions data of the years 2006, 2009 and 2012 resembling different phases of the economic cycle. Furthermore it recognizes and analyses the investment strategies of different investors in relation to the transactions data in order to determine the actual competiveness of investors with different organization types during the observation years. The assumption behind this research is that in order to successfully purchase assets the investor is required to have relative competitive advantages compared to other investors participating in the purchase process in order to be able to place the asset's highest purchase bid. According to research results the competiveness of investors with different organization types indeed varies depending on the current dominant phase of the economic cycle. Despite this the results show that domestic publicly listed commercial real estate investors are extremely competitive during all the observation years with a significant difference to other organization types. Furthermore the theory discussed in this thesis supports the fact that publicly listed commercial real estate investment companies possess good conditions to perform very competitively in the markets