Corporate real estate specificity, ownership and its contribution to firm performance: empirical evidence from the German capital market

Abstract

Since decades, the choice between ownership, leasing or renting in corporate real estate management has been discussed in numerous articles. The studies have mainly focused on demonstrating the negative effects of ownership on the capital market performance of non-property companies. A wide variety of influencing factors has been identified, which demonstrably determine the real estate ownership strategy as well as its valuation by the capital market. The reliance of the ownership decision on the real estate specificity instead, has been explained by its strategic importance, but in the course of a theoretical, resource based approach only. This one-dimensional view misses possible consequences for other company divisions though. A further complicating factor is that the strategic value of specific resources, which is a major motive in favor of ownership decisions, is strongly dependent on business environmental changes. In times of structural change and increasing uncertainty, this could cause investments in specific real estate to be withheld or even alternatives to ownership to be considered. This paper aims at filling this research gap by using German balance sheet and capital market data to prove the linkage between specificity and ownership intensity by taking environmental dynamics into account and to show potential effects on the capital market performance.The article begins with a literature-based derivation of the concept of specificity focusing on the theory of the firm on the one hand and its role in corporate finance on the other. The impact of ownership, leasing or rental solutions in the case of specific real estate can be operationalised by using a framework of Pfnuer/Seger (2018). In the following multivariate regression analysis, the influence of real estate specificity on the intensity of ownership is tested while also environmental dynamics are considered. The valuation of the capital market is examined using the Fama-French factor model.The article points out on a theoretical level that ownership of specific real estate is not only based on its strategic importance. Moreover, questions of corporate finance and changes in the business environment are also relevant. Empirical evidence confirms the positive correlation between specificity and ownership strategy. In addition, the analysis provides information on the influence of specificity and ownership strategy on capital market performance.The paper expands the scientific discourse by explicitly linking real estate specificity with the choice between ownership, leasing or rental solutions and corporate success. The article concludes that the irreversibility of specific real estates should be considered in the ownership decision in order to avoid inefficiencies. This especially accounts for firms which operate in a structurally changing business environment.