Real Estate Investors and Service Providers in Central and Eastern Europe: A qualitative Analysis of Principals and Agents

Abstract

This study looks at the relationship between real estate investors and service providers (valuators and brokers) in the commercial real estate market of Central and Eastern Europe. Based on principal agent theory and related concepts of behavioral real estate economics, we analyze the relationship between these two groups of actors on two levels: theoretically and empirically.From a theoretical level, we look at the context in which the two groups operate and at the role, each of them performs in a commercial real estate investment deal. Real estate investors are typically active in various countries of the CEE region. They manage portfolios in the whole region and therefore have to deal with different legal systems, regulations, customs and norms. In order to cope with this issue, they often hire local service providers who have a better understanding of the local context. This creates an information asymmetry, which may form the basis of conflicts of interest and principal-agent relations. Moreover, valuators and brokers provide services to the investor that may strongly influence the profit the investor can generate from a transaction. Because of this, the investor prefers one type of result from the service provider over others and will probably attempt to guide the service provider in the preferred direction. From the theoretical analysis, we derive hypotheses about specific types of actions and behavioral strategies of the two groups if they really are connected in a principal-agent relation. These hypotheses form the basis of our empirical analysis. We interviewed investors and service providers active in the CEE region and analyzed the interviews with NVivo. Because of the many national contexts relevant for service providers, we focused this side of our empirical analysis on Austria and Romania.Our results provide strong evidence for a principal-agent relationship between investors and service providers in the CEE market. The interviews bring up many statements that support this hypothesis. Investors as well as service providers are aware of this conflict of interests and try to manage it. We can identify key strategies of both types of actors and relate them to the theoretical literature.