How real estate firms non-market strategies shape competitive landscapes in the private real estate sector

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How real estate firms non-market strategies shape

competitive landscapes in the private real estate sector

Axel Rännar Daniel Wignell Victor Hrelja

School of business, Society & Engineering

Course: Bachelor Thesis in Business Administration Supervisor: Edward Gillmore

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Abstract

Title: How real estate firms non-market strategies shape competitive landscapes in the private real estate sector

Authors: Daniel Wignell, Axel Rännar and Victor Hrelja Supervisor: Edward Gillmore

Background: This report seeks to address how real estate firms work with non-market strategies to further influence and manage public decisions on the market which supposedly strengthen the firm's position on the market and secure future growth. Previous research in the area of real estates has been done frequently over the past decade with aims such as to investigate profitability, nature of real estate investments, growth in the real estate market, dividend and interest rates, - however research in the area of interest has not been significantly covered.

Purpose: The purpose of this report seeks to resolve questions about how real estate firms in Gothenburg, manage and mobilize capital and conduct strategies for higher yields, how the real estate firms work with non-market strategies to achieve economic growth and social impact.

Methodology: This study uses a qualitative approach and is limited to real estate firms in Gothenburg, Sweden. Semi-structured interviews have been chosen to collect empirical data.

Conclusion: The firms investigated upon, manage capital gains through a high loan to value ratios, and constantly works with dynamic capital with the intentions to always have the capital in movement; through new investments, which maximize the possibility to have high returns

Keywords: Gentrification, real estate, real estate market, non-market strategies, income, investment

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1. Introduction

1.1 Background

In light of the recent passing of the famous economist Oliver Williamson who is a nobel prize winner. It is sometimes forgotten within the broader business, organizational and strategy fields of research that transaction cost economics of which Williamson was a major champion, is an underlying foundation towards understanding these fields due to imperfect markets and why business enterprises exist. To this end our study on how real estate firms utilize their non-market strategies to influence market dominance is a timely reminder.

This report seeks to address how real estate firms work with non-market strategies to further influence and manage public decisions on the market which supposedly strengthen the firm's position on the market and secure future growth. The report, explains how real estate companies can collaborate with municipalities in Sweden to maximize profits. The investment will further explain how firms utilize gentrification for profit maximization as a market strategy,

communication with regulatory bodies as a non-market strategy for the securement of the firm's future growth. e.g in 1962, a gentrification began to take off in Brooklyn Heights, New York and today Brooklyn Heights has been integrated into Wall Street, since substantial numbers of Brooklyn Heights’ residents are employed in the finance, insurance and real estate industry. There is a few select areas of global cities like London and New York that similarly have become the focus of intense investment (Lees 2003).

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The real estate industry/market is becoming more and more a viable option for capital spending among both private actors and large firms for investing, and a trend can be seen that over the last three decades in the national Swedish market an increase of capital can be seen in the real estate industry (Maklar statistics). Specifically in Gothenburg, where the companies investigated upon in this report are active within, over 1000 Billion SEK is reported to be invested in real estate development (mainly residential and office spaces) until the year of 2035 (Business Region Gothenburg: Svenska Byggindustrier). Today the real estate industry worldwide estimates a worth of 228 trillion USD (HSBC statistics). Real estate has four market categories: residential, commercial, industrial, and land. The word estate refers to all the objects an entity own. When investors invest in real estates industry they do not only take into account the physical asset but a lot of opportunities around it such as the right to develop and improve/renovating the real estate they own, the right to lease the real estate and also the right of selling the real estate

(Brueggeman & Fisher 2011).

The Real Estate development industry in many countries operate under conditions with

oligopolistic market characteristics (Seow et al, 2003). The industry is dominated by a few large actors which operate and conduct investments locally and internationally in different markets simultaneously. Over the past 30 years a connection can be seen between fallen real estates interest rates and rising real estates prices, this has led to a higher amount of lending and greater investment interests in the sector (Barkham R et al, 2017). Different markets, demand different marketing strategies to achieve its objectives, non-market strategy can be described as a way to pursue strategic goals through political and social leverage. The idea of non-market strategies is

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to work with regional bodies to achieve an effective and profitable environment to secure the investments and maintain growth (Baron 1995). This strategy can be used for real estate firms in the way of collaboration with different regulatory bodies, in which they can contribute to each other.

The gentrification of neighbourhoods in central parts in cities is motivating factors for the cities development. The regulatory bodies such as municipality have incentives to communicate with private real estate development actors for operationalization based on the public directions for development. This process of negotiation of land and development plans have a significant impact on the real estate firms capital streams and structures. However, the firms nature of profitilization can lead to the firm exploiting a supposedly free liberal market, establishing ways of communication catering towards monopolistic market behaviour. According to (Friedman Doctrine, 1970) firms aim to maximize profits by utilizing strategies to minimize risks for efficient and profitable operations, according to the shareholder theory the firms have no social responsibility, however is this the case when companies are borderline starting to breach a UN regulation? This report seeks to address how the local real estate firms in Gothenburg, Sweden utilize political guidelines from the municipality to invest, organize capital, and develop certain central areas within the city and how the nature of communication between involved actors are shaping the market.

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1.2 Problem

One question that the report seeks to address is how local real estate firms price their property projects. Given that there are only a small number of developers, it is interesting to evaluate the market based on how active real estate firms utilize gentrification based on political guidelines to conduct investments within the city, which the real estate firm utilize for profit maximization for the shareholders gain (Friedman Doctrine, 1970).

Property development and investments are capital intensive, to properly develop certain areas the real estate firm has to both finance the purchasement of land and the constructions. Land is scarce in central areas and its high price is representative of the scarcity (Kaushik Basu. Patrick M. Emerson 2003). This in combination with the factor that medium sized to big-cities have always been dynamic locations where higher income people, living in more attractive areas often coated in the center of cities and lower income people are staying outside these areas. The term gentrification is described by (Clark, Eric 2005) as a process of change of population in a certain area where the new residentials have a higher socioeconomic status than those living in the area previously.

The specific problem in this report can translate towards how the real estate firms non-market strategies consists of different type of interactions with regulatory bodies in respects to

negotiation. Inherently these interaction affects how the firm chooses to construct the non market strategy which affects the market strategy (Baron 1995).

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In regards to transaction costs economics theory, there is a problem in certain domestic real estate markets, more specifically upon how the firms can minimize costs in the planning phase together with the regulatory bodies, since there is no measurable variables (costs) due to

differences in time of planning and reshape of the projects in the real estate sector. Therefore the respective firms try to create adoption in regards to how the regulatory bodies can change the project. Williamson, (1979) describes this in a chapter titled “Chester Barnard and the Incipient Science of Organization” as: “The proposition that adaption is the central problem of economic organization”

The problem that comes with the development of neighborhoods in central areas, are also monopolistic market tendencies. E.g According to (Kaushik Basu Patrick M. Emerson, 2003) the concept of “tenancy rent control” allows the landlord to set the rent freely when leasing to a new tenant, in the equilibrium it may be in the landlord’s interest to keep the rent for new tenants so low that there is excess demand for housing at that rent. In this process the municipality sells land with demands for development of certain areas, which ultimately affects the firms abilities for revenue.

1.3 Purpose and Aim

The purpose of this report seeks to resolve questions about how real estate firms in Gothenburg, manage and mobilize capital and conduct strategies for higher yields, how the real estate firms work with non-market strategies to achieve economic growth and social impact. As mentioned earlier, the real estate industry is a huge player in the global market and plays a significant role

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and have a big impact on the world economy hence attracting different actors within the market such as:

● Public actors: Governments, Financial institutions, Municipalities, and Landsting (swedish).

● Private actors: Investors, Real Estate Firms, Architects, Commercial Residential and Industrial tenants for facilities/housing.

Previous research in the area of real estates has been done frequently over the past decade with aims such as to investigate profitability, nature of real estate investments, growth in the real estate market, dividend and interest rates, however research in the area of interest hast not been significantly covered. Specifically, in the area of non-market strategies and how that benefits real estate firms procurement of return on capital spending. What this report will further focus upon is to resolve questions how real estate firms in Sweden specifically in Gothenburg, manage and mobilize capital and conduct strategies regarding investments. The paper will also look at the consequences of large real estate firms investments in terms of non-market strategies affect on economic growth and social impact in certain central areas.

1.4 Research Question

How do real estate firms manage non-market strategies in Sweden to improve market conditions and capital gains?

How do real estate firm utilize gentrification as part of their non market strategy to achieve profit gains?

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1.5 Research contribution

The research contribution made by this study is to shed light on how real estate firms in Sweden work with different strategies to be successful both financially as well as from a social

perspective. The actors seek to contribute the research towards various market theories,

economic theories, and transaction cost economics theory. The contribution exists in the form of research within real estate firms communication strategies with regulatory bodies and its effect on the market, how the firms utilize the guidelines for its own self-interest, and how capital should be managed efficiently. Previous research has aimed towards research within the areas of profitability and growth through mostly quantitative approaches. What this study aims to achieve is specifically in the area of non-market strategies and how those strategies benefit the real estate firms pursuement of high returns on capital spending´s.

1.6 Definitions

● Real Estate Industry

Four different type of real estates or asset classes:  

Residential, Commercial, Industrial and Land, and are also made up by several business areas such as; Development, Sales and Marketing, Brokerage, Property management, Lending and Professional services: law, accounting, etc (American Corporate Finance Institute).

● Real Estate Development:

The process of real estate development is a business activity operationalized by real estate firms that ranges from renovation and re-lease of existing buildings to

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purchasements and investments of raw land and sales of developed land to other actors in the market (Peiser, Richard B; Frej, Anne B, 2003).

● Gentrification

Gentrification is a term that represents a social status increase in a specific area. Gentrification often happens when renovating big parts of an area and pushes lower income people out and instead attracts higher income people through costly remodeling of the neighbourhood (Neil Smith & Peter Williams 2007).

● Monopolistic market

A monopolistic market is a specific market state where only a few or one company may offer a product or specific service, a monopolistic is the complete opposite to a perfect competitive market where many competitors compete. A monopolistic market has high barriers for other firms to entry due to legislation as well as the current firms are currently holding all the available resources (Robert Pindyck 2017).

● Transaction Economics Theory

The theory explaining the actual cost of an economical transaction, as well as how organizations should strive to diminish transaction costs to achieve economic efficiency (Williamson 1979).

● Market Strategy

Market strategy is a direct process of ongoing business activities in a market

environment, the market strategies purpose is to create additional value to shareholders by improving the economic efficiency of the company (Baron 1995).

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A non-market strategy is a strategy organization utilizes when an opportunity is realized outside the market environment (e.g lobbying, political activities) in order to reach the firms goals (Baron, 1995).

2.0 Literature Review

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Theoretical framework

The theoretical framework within this thesis is related to our problem background and the

theories presented are relevant to our research of interest, the theories chosen by the authors aim to strengthen and support the thesis.

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2.1 Transaction cost economics

Within economics the transaction cost theory is a economic efficiency, corporate governance theory by (Williamson 1979), the transactional cost theory explains how there is a cost for every economical transaction made within an organization and an external cost to customers and suppliers. The transaction cost theory describes how organizations should strive to minimize transactions to improve economic efficiency by minimizing the number of transactions within their organizational network. By minimizing transaction costs the firms are able to achieve growth, generate more revenue and work more efficiently for its shareholders. According to (Williamson 1979) the transaction cost is not only the case of economical transactions but also acts as gifts, emotional interactions, as well as political lobbying.

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Market economies, unlike their economic models, do not always lead to perfectly efficient allocation of goods and services (Boyd Cohen 2005). In regards to the real estate market, conditions for future prices are not complete or set, and as explained by (David Bach 2010) implications regarding future information exists, - hence the market has imperfect information which is a characteristic that according to (Robert Pindyck 2017); is the opposite to a “perfect competitive market”. Which is also the definition of market imperfections; “a market which does not meet the standards for a pure competitive market in equilibrium". However given the

criterias for a imperfect market that fits in line with the real estate industry, according to (Peter Buckley 2018); The internalization theory explains the emergence of the firm to efficiently coordinate the firms respective business activities to solve the market imperfections.

Since the firms operate in a imperfect market that consists of incomplete information, the actors or firms involved in the process of negotiation must continually make assumptions about future social norms, technologies, and direction of changes in personal, natural and political conditions. Each separate real estate project within the city / real estate development project is unique, which results in the creation of political processes that exposes the respective projects for negotiation, debates and reconsiderations of the basic issues that come with enterprise economies (James A. Graaskamp, 1981). - Which also is mentioned by (James A. Graaskamp 1981): who pays, who benefits, who will take the risks, and who has standing to participate within the decision making process.

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According to The Nature of the firm (Ronald Coase, 1937) firms should aim to minimize transaction costs by forming strong partnerships, either with other businesses but also with institutions, other suppliers, anyone who can help to minimize transaction costs.

The cost saving initiatives based on the firms nature, lead to profit maximization which is an economic turn which refers to the short or long term strategy a firm utilizes to adjust parameters such as (Price, rent, input & output levels), which in turn gains the firm the largest amount of profit (Steven E. Landsburg 2002). Profit maximization is the goal of all firms, selling products or services so generated revenue exceeds the firm's total costs.

The importance of transaction cost economics in relation to business administration is proven to easily, and extensively relate to business administration. This relationship between transactions cost economics and business administration is commonly described as a theory that informs the practice and how firms allocate resources, (Williamson, 2005). Whereas similarly as the

transaction cost economics theory describes; how the allocation of resources is pursed, according to Adam Smith’s theory of the invisible hand asserts that firms operating within the market is pursuing their self-interest without regard to the interest of others, will collectively benefit to society through economical means by allocating resources for internal growth. However this self-interest will inherently affect the firms ethical conduct and thereby affect the firms business decisions / practices (Stovall 2004). Adam Smith’s Invisible Hand (1776), has been founded in one of Smith books An Inquiry into the Nature and Causes of the Wealth of Nations published in (1776). Adam Smith's theory is still referred to and related to within economics; when pursuing profits and self-interest in today's business world. The invisible hand theory will make sure that

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pursuit of one's own interest is morally justified, this is because the invisible hand of the marketplace will ensure this result to be in the interest and good of the society, prices will be adjusted accordingly to the market and eventually find its way to equilibrium (John D Bishop 1995). The idea of the invisible hand according to Adam Smith is that free individuals operating in a free economy, making primarily self-interest decisions will benefit society as a whole and his belief that regulation and large scale government intervention is neither beneficial nor necessary (Harrison 2011). However according to (Pongsiri, Nutavoot 2002); regulations in the market should exist, in the form of public to private partnerships, since there will be institutional forms of dealing with market failures. The public actor within the market does not only provide services but also provides monitoring of the local marketplace, - hence gaining more information on how to combat market failures with regulatory decisions / frameworks. In turn legitimizing the business activities within the market (Pongsiri, Nutavoot 2002).

According to (Coiacetto, 2006) industrial economics is an established scholarly field, where attention upon government economic policies are studied thoroughly in markets such as retail, aviation and transport industries. However studies concerned with regulating real estate development have not been extensively studied. And that implications exist regarding matters such as affordability, the form and structure of cities, and power relations with industry regulators. Which creates opportunities for monopolistic tendencies to emerge within the

industry. And according to (Adam Smith 1776) an interpretation of government involvement as a negative factor towards the free market can be found, hence it correlates the theory in regards to that the industry regulators should not be involved in the process of negotiation. - Since it

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according to (Robert Pindyck 2017) will lead to a market with monopolistic tendencies where the actor / few actors will manipulate the market by restricting / manipulating different parameters such as, prices and output which creates an inefficient market scenario. In a perfect functioning market, the market arrives at a state known as “perfect competition”, in a perfect competition environment all the firms have the same information, no actor has the ability to influence price, multiple firms are selling the same kind of service or products (Robert Pindyck 2017).

2.2 Market strategies

Market strategies is a process of business activities in the market environment, with the purpose to create value by improving economic performance. The market environment includes

interactions between the firm and other actors involved in the same market (Baron 1995). Firms that are operating within the real estate industry daily work together with buyer and supplier relations, these often consist of large construction companies, these types of buyer and supplier relations are important to maintain health for effective communication and performance (Chad W Auty, Susan L Golocic, 2010). However, according to Friedman Doctrine (1970) the firm only has one social responsibility of the business: “There is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." (Friedman Doctrine, 1970). An investment is an obligation of money made by the investor to generate resources in the future with the trade of being a certain degree of risk (Bodie et al 2014). Money can be invested into several assets such as, real estate. Within the real estate idustry there are two major types of investors, the individual investor (private) as well as

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the institutional investors (real estate firms) (Peter Chinloy, 2014). The two investor types within real estate differ from each other as the first one (private) can be seen as short term investors who owns real estate over a relatively short timespan. The other one (institutional), have large

amounts of capital and own real estate over a very long timespan and on a much larger scale than the private investor, they also have the power to negotiate financial benefits (loans and interest rates) from banks into their favour (Peter Chinloy 2014).

The process of improving economic performance and developing profitable market strategies relates to the Shareholder theory (Friedman Doctrine, 1970), which describes the view that corporations only exists to generate resources (money) for the organizations shareholders, the theory also describes that the only individuals that the organization is ethically responsible to is its shareholders of the organization itself and that the entity should not act “socially responsible” to society (Friedman Doctrine, 1970).

2.3 Non market strategy

As opposed to the firms market environment, there is also a non-market environment which includes the interactions of the firm and regulatory bodies. As a result firms establish non market strategies, which seeks to increase the firm's overall performance, (Baron 1995). The presence of the government or regulatory bodies in private business transactions either directly or indirectly, means that the competitive environments in which the firm operates depend heavily on public policies. In turn consequently creating an incentive for firms to design a non-market strategy to impact regulatory decisions (Brian S. Silverman, Paul L. Ingram, 2002).

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Non market strategies are the possible strategies for the firms to act upon by lobbying, or

participating in political activities according to (Baron, 1995). As firms use nonmarket strategies they might gain the possibility to accumulate competitive advantages through political as well as social connections. A nonmarket strategy realizes that the company is not only driven by

economic transactions but also through the nonmarket environment they are operating within such as through laws, and social responsibility, as multiple actors can and seek to influence them (Baron 1995).

According to the theory, operating firms are indirectly or directly in some cases maintaining relationships with the nonmarket environment within their business network, the firms do have the possibility to influence it and by so creata long term competitive advantages for the firm (Baron 1995).

According to David bach (2010) smart businesses should aim to maximize relationships for improved nonmarket benefits to create a sustainable and long term competitive advantage for their own best interest. However the property market is characterized by failure, since there is imperfect information in regards of the needs of future generations. Resulting in arguments that provide a rationale for regulatory bodies to intervene in planning. The real estate / land planning can create value for the firms by generating a more positive pattern through communication with regulatory bodies. The size of land owned by real estate developers, affects power and influence through lobbying, persuasion, litigation, corruption, and the use of the media to make planning submissions, which in turn can reduce competition (Ball, 1983).

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2.4 Conceptual framework

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The figure illustrates the process of real estate firms communication and business model in relation to the regulatory bodies decision making, the firms work with non-market strategies to further influence and manage public decisions on the market which supposedly strengthen the

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firm's position on the market and secure future growth. The firm develops a market strategy to secure financial growth. Gentrification is based on political guidelines for the development of central areas in the city. As the figure above describes we can see how all these different concepts connects and lead to profit maximization. As previously expressed in this thesis, the authors found literature focusing on profitability and growth through a quantitative approach in the real estate market, however there seems to be scarce literature on the relationship between these concepts displayed.

The model describes the process of how the following is connected: A real estate firm conduct their market strategies in synergy with non market strategy to take advantage of a market

situation which naturally leads to the firm developing real estate as a business model, non market strategies affect how the real estate development can be affected by external factors, the real estate development results in the firm utilizing respective market and non market strategies in synergy to maximize in returns / profits.

3.0 Method

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In this section the authors present the empirical evidence that was collected through interviews, it shows how the following method has been used to justify the steps the authors took when conducting the academic paper.

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3.1 Epistemological considerations

Epistemology is a theory of the nature of knowledge and justification and according to Fisher (2010) this concept concerns whether knowledge defines as acceptable or not. To go deeper and further about this theory one can say that Epistemology theory discusses if natural sciences knowledge and the social world are justifiable, reliable and valid (Bryman and bell 2011). And according to Bryman and Bell (2015) an epistemological issue refers to if knowledge is socially acceptable. There is different types of epistemological considerations such as positivism, interpretivism and constructivism. This report follows a constructivist standpoint which is a branch of epistemology, constructivism refers to if the knowledge displayed is socially justifiable. Constructivism argues that humans generate knowledge and meaning from an interaction between their experiences and their ideas (Duffy, 2006). Constructivism can be seen as helpful because it can identify the principles of socially constructed realities. (Robson, 2002). “The common core of the constructivist theory is that we do not find knowledge, we construct it” (Boghossion, 2006). Hence this report will conduct a qualitative research method that will be constructed based on the subjects of research knowledge, which later on will be constructed into interpretations and conclusions of the knowledge found.

3.2 Research approach

There are three different approaches that can be chosen as methods when conducting a study, inductive, deductive and abductive, every study uses its own approach to be able to create the best and most reliable outcome . According to Bryman and Bell (2011) the inductive method aims at developing a theory from the data collected to explain the social phenomena. The

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inductive method has been criticized throughout the years for the reason that no amount of empirical data will be enough to enable new theory generation. The other approach the deductive method aims at testing an already existing theory, (verify or falsify that theory). According to Bryman and Bell (2011) there are some flaws to this method as well, due to the fact of verifying or falsifying theory and it is unclear which theory should be tested in certain research areas.

The deductive method which consists of hypotheses of proven theories are not suitable for this paper either. For this paper a inductive method will be more suitable and therefore will be used for this research. The object of this study is to gain knowledge and generate more understanding around how real estates work in terms of maximizing revenues, thus it aims to generate more understanding in already existing theories.

3.2.1 Research strategy and design

This study aims to investigate how real estate firms work through strategies to maximize profits and its consequences it might have in certain areas, and according to Bryman and Bell (2011) two different research strategies can be used; quantitative alternatively qualitative strategy. For this study a qualitative method of collecting data is chosen since this is a qualitative research, the data collection is following Bryman and Bell guidelines (2011). Qualitative research is a

gathering of non-numerical data and focusing on the meaning instead of numbers, it is used to describe, understand and interpret reality in a universal approach (Bryman and Bell, 2011). Also according to Jutesen and Mik-Meyer (2011) who state that qualitative studies are more suitable

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when interviewing a smaller group of people and afterward analyzing the material/data gathered which is in line with this study.

Quantitative research focuses on data that consists of numbers or data that can be converted into numbers. With the collecting data the goal often are to generalize the whole population through the investigation conducted (Bryman & Bell, 2013). A quantitative study is not appropriate for this study and a qualitative approach will be used in order to result in the best and most reliable outcome of this particular investigation.

3.3 Secondary data

The study began with an interest in the real estate industry and thorough reading of articles and books with the aim of finding something that contributes to the real estate industry and

something that could be investigated. This was made to gain a broader understanding and get a theoretical perspective to carry out a proper analysis of the collected data. The collection or the gathered secondary data was made through academic literature, financial reports, and yearly reports from the different companies; Vasakronan and Company B. The articles used for this study have mainly been published in renowned journals, the financial reports were found on SCB (statistics Sweden's annual reports). When finding the relevant articles different keywords were used and searched upon. These keywords helped to narrow the research down into relevant information and helped to find the right articles.

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3.4 Research site

3.4.1 Presentation of companies

Two different companies were chosen to conduct our comparative case study, different aspects where thought of when choosing these companies. The companies had to be real estate firms operative in Gothenburg, Sweden, also the firm's size in revenue, net profits and market power were considered.

One of the chosen companies had no problem of being public throughout the study however the other company wanted to be anonymous for several reasons mentioned further down below in the report. - Therefore the authors has taken the decision and name these companies as

Vasakronan and Company B in this study.

Company A (Vasakronan) is a real estate firm operative in the bigger cities of Sweden: Malmö, Stockholm, Upsala and Gothenburg. Vasakronan is the biggest real estate firm in Sweden with a portfolio consisting of 174 properties with a total area of 2,3 million square meters and the

Gentrification Non-market strategies

Real estate Profit maximization

Investments Monopolistic markets

Real estate market Shareholder theories

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market value of the portfolio estimates to a total value of SEK 156 billion (Vasakronan årsredovisning 2019).

Company B has chosen to be anonymous, and is a smaller real estate developer according to industry standards, they are operative in the west coast of Sweden, their business model consists of market offerings that include high-end residential real estates, with a close connection to nature to be more attractive towards people interested in outdoor life.

3.5 Primary data

3.5.1 Qualitative interviews

To collect the desired data this study has used a qualitative approach and semi-structured interviews that has been conducted as the main source for data. According to Fisher (2010) interviews are often seen as the best way to enter a person's points of view and their experience and knowledge. For this particular report the main conducted data will be from interviews and also compared with secondary data to strengthen the results.

The interviews were conducted through the communication platform Zoom due to safety measures in consequence of the corona pandemic. Four people were present and active during the interview, this goes in line with what Gummesson (1985) says which means that this type of interview method is the most successful way of conducting a semi-structured interview. All the interviews were recorded in order to listen, transcribe and code the interviews afterword, the

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and participate during the interview in a more effective way instead of focusing on taking notes throughout the interviews. Bryman and Bell (2012) argue that recording the interviews enables a deeper understanding and analysis of the collected data when exact keywords and expressions can be documented and not lost due to the lack of taking notes, focus or lack of memory from the interviewer.

3.5.2 Interview guide

To be able to gather the right data and get out as much as possible from the interviewees, semi-structured interviews have been chosen for this study. The reason behind the choice of this data collection method is because face to face interaction is argued by Bryman and Bell (2011); to be reliable and the most efficient way where the researcher can participate in the mind of another person. - Which in turn is supported by the statement that one must do this to acquire social knowledge (Bryman and Bell 2011). The questions will also be more open-ended, meaning; there is not just one answer to one question by conducting the interview in a semi-structured which in

Interviews

Position Length Date

Regional head manager at Vasakronan AB

45 min 2020-04-27

CEO at Company B AB - serial entrepreneur within real estate

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turn lets the interviewee have a degree of flexibility in what to answer. It also gives the possibility to ask follow-up questions in case new relevant information comes up through the interview.

3.6 Qualitative data analysis

According to Bryman and Bell (2011), there can arise some problems and difficulties when collecting data using qualitative information, since the gathered data is often a lot of information but not structured in a good way and the information may not have a logical succession. In order to analyze the gathered data and draw correct and accurate conclusions from the information, coded transcripts will be used with theoretical keywords in line with our theory and conceptual framework. The coded empirical evidence will be analyzed accordingly to what Bryman and Bell (2011) which defines as thematic analysis method.

3.6.1 Coding

Coding and how to actually code the collected data in a qualitative research are essential to the study and can be seen as the central process in qualitative data analysis to get the most valuable and reliable result (Bryman & Bell, 2011). Coding consists of reviewing transcripts and notes and categorizing them accordingly. Since this study has chosen a semi-structured way of interviewing how to review the transcripts and how to structure the findings will be a key point in order to make this study worth. The empirical data collected has partially been fragmented using the selected keywords in the study, keywords have been selected through the interviews to

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highlight the most important data in order to collect the relevant and important data from the conducted interviews.

3.6.2 Operalization

3.6.3 Analysis method

The analysis section of the collected empirical data is very closely related to coding. What this study has done relies on the conducted interviews and secondary data and will be analyzed through a thematic analysis accordingly to (Bryman and Bell 2011). The structure of the analysis

Concept Conceptual variables Conceptual definitions Keywords Real estate development/market Non-market strategies Non-market strategy is the firm's response to regulatory presence to influence decisions or political guidelines for their cause. Municipality, regulatory bodies, lobbying, collaboration, political guidelines, firm influence Market strategies Investment strategies, real estate development, Belåningsgrad Competitive Advantage, business strategy, performance, firm strategy Profit maximization Definitions of parameters to achieve the highest profitable yields Utilization, profits, incomes, cost minimization, yields, investments Firms environment Firms environment which are beyond its control;purely

competitive market or regulatory market?

Monopolistic market, invisible hand,

Gothenburg real estate market, real estate markets

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method is built on concepts that relate and affect the real estate industry, the analysis part is structured in a way that follows the conceptual typology and is fragmented in a similar way, this has been done to make the understanding of the empirical data in an easy and consistent way to follow.

The analysis chapter of the study firstly will determine what is included in the real estate industry and different phases and will also discuss the collaborative and cooperative relations that have been made and revealed throughout the analysis of the empirical data collected.

3.7 Quality of the study

According to Bryman and Bell (2011) two key factors used when evaluating the quality of a study which are validity and reliability. What Bryman and Bell also state in their book is that there have been some concerns around these two (reliability and validity) specifically in a qualitative study, and they propose another way of looking at the quality through; credibility, dependability, transferability and confirmability. Therefore this section will contain a discussion in how this study took these four terms into consideration throughout the research.

3.7.1 Quality aspects

- Credibility

The Credibility aspect has followed the guidelines of Bryman and Bell (2011), also defined as trustworthiness has been taken into account throughout the whole study. By asking the interviewee that the recorded data were in fact the outcome that the

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interviewee had in mind so that nothing was misinterpreted of what was said. The questions were also sent in advance to the interviewee so as to give the opportunity of preparing the most accurate and reliable answer possible.

- Dependability

Dependability means how to judge a qualitative study and refers to the stability or consistency of the inquiry process used over time. This study has made sure of this by working closely with a tutor and other students to always get inputs and feedback to keep the quality as high as possible.

- Transferability

Transferability concerns the aspect of applicability. The transferability aspect according to Fisher (2010) has to do with the conducted study being able to generalize it´s result and use it in a different context. This study examines and explains how the real estate firms in Sweden work with non-market strategies to achieve economic growth and social impact, the data collection was carried out through the processing of information of two different competitive firms in Gothenburg as a comparative case study. However the result of this study can be generalized to all real estate firms in Sweden in the aspect of how real estate firms work through different strategies to achieve profit maximization as long as the political guidelines doesn't change for the industry. The results of this study can be useful to provide information about how real estate firms are working and collaborate with different regulatory bodies.

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Confirmability concerns the aspect of neutrality in the study. The interpretation of the study should not be based on personal opinions or values to steer the study one way or another. The authors of this study have helped each other throughout the thesis to always act in a neutral way of thinking and writing and also other thesis students has helped the thesis by contributing oppositions in order to keep it objective.

3.7.2 Ethical considerations

In this study some ethical considerations had to be made. Due to sensitive collected empirical data from the conducted interviews, the Interviewee from Company B asked to remain anonymous throughout this study, which has been done by request and is not seen as any

problem. The material collected from the interviews has only been applied and used in this study and not for any other non-scientific purposes.

3.8 Limitations

The study is limited to two different companies investigated upon, specifically in the real estate industry and representatives from these actors are limited to two different interviewees.

Alternatives to this could have been to investigate even more firms or conduct more interviews to gain more and broader knowledge or interview or conduct qualitative data gathering through interviews with regulatory bodies. This study is also limited geographically towards Gothenburg, Sweden, the study could have been made more broadly through studying more areas in Sweden hence creating a general applicable model for Sweden.

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There is also a need of research contribution towards non market relationships in the real estate industry due to vague previous research around this area. And because of profit maximization which exists in the firms nature (to achieve financial goals), - it displays how firms naturally minimize costs, hence contributing in how the organization / firm can diminish transaction costs resulting in contribution towards transaction cost economics theory due to different ways of cost diminishing returns within the firms.

4.0 Empirical data

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In this section the authors present the empirical evidence that was collected through interviews. It has been structured accordingly to the operalization and chosen related factors in real estate development.

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Historical findings of Vasakronan

The real estate environment closely collaborated and operationalized with the municipality in Gothenburg, in the region of Gothenburg there are as well multiple actors who are competing about the same market. During the past years the city of Gothenburg has targeted the area

Hisingen as well as the harbour area known as Eriksberg to quickly try to solve the situation with lack of housing (Gothenburg Municipality, 2014).

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Vasakronan has focused its resources where they believe most return will be given on invested capital, the cities targeted according to their report are Stockholm, Gothenburg, Malmö as well as Uppsala.

In the case of Gothenburg, Vasakronan has of 2019 invested a total of 2600 MKR from its assets into developing projects in the Gothenburg Area. The return on capital has been the highest in Stockholm, closely followed by Gothenburg, 9,3% (Stockholm) respectively 6,8% from Gothenburg (Vasakronan Annual report, 2019).

Vasakronan has also been able to create working relationships with the municipality of Gothenburg as well as other associations of interest to cooperative develop the city of

Gothenburg in the most efficient and convenient way possible to establish further growth and exploration of opportunities (Vasakronan Årsredovisning, 2019).

4.1. Interview

Vasakronan

From the first interview, the authors established an interview with a representative from Vasakronan AB - Magnus Tengberg - Head of real estate development/Region Head of the greater Gothenburg area. The interviewee have experience within the area of research based on the authors concepts of studies, and has worked for Vasakronan AB since 2003.

The interviewee described Vasakronan´s area of operations and how they are utilizing market strategies, as well as their cooperative partnership with the municipality of Gothenburg.

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4.1.1 Firm environment

“Gothenburg and the greater regions is experiencing extensive growth for the past years with no signs of slowing due to increased working opportunities with strong international presence“ - Magnus Tengberg.

In the Gothenburg region, Vasakronan looks optimistic about the future, since they are specialized in commercial real estate it is important to Vasakronan that the region where they operate within have developments in the respective market industries. There’s also a lot of different chinese investments being made, and a element of a mixture of domestic and

international ownership structures. There's also large-scale infrastructure projects e.g the west link which will enlarge the regions workforce and create a regional city core, enabling

Vasakronan to work with larger volumes in their projects. Vasakronan operates in a traditional western market environment with a element of regulations through the municipalities and other regulatory bodies involved in the business transactions/investments.

 

4.1.2 Market strategies

“Diversification in our real estate portfolio are important for minimizing risks” - Magnus Tengberg.

When conducting investments Vasakronan go through a three step process: 1. Studies on area of exploitation is it possible to develop?

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3. Investment decision and evaluation

Vasakronan primarily conducts studies and reports on whether the area are exploitable, what market segment exists in the area today? Will it create value for the organisation? How does the projections for the area look like will it grow in the future? After evaluation of these type of analytical projections Vasakronan establishes an investment decision and if approved large-scale investments are made.

Vasakronan counts returns, the goal with a project or development of real estate is to have 0.5% higher yields than the market average. To achieve these goals Vasakronan operates in a segment which consists of three main areas:

● Asset management.

● Sales and purchasement of real estate and land/areas with application of our strategies. ● Project development.

Vasakronan also have the vision for the “The good city”, which involves creating more

movement in the area, and the strive to make areas more attractive by making a city district more alive. By making the area safe, attractive and a popular place to visit, it will eventually lead to higher rents which leads to higher profits, resulting in Vasakronan winning in the long run.

The investment needs to be sustainable and have a long term vision. For Vasakronan the

investments need to reflect what our customers/tenants are experiencing, - since Vasakronan are large within the area of commercial estates, Vasakronan develops specialist competencies which

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are essential for building a city. In turn Vasakronan offers that knowledge to customers which results in them finding more successful solutions. This is something Vasakronan works with and continuous improvements with focus upon following the customers development.

Vasakronan establishes investments based on expectations. In the situation of analyzing future break-even of investments, Vasakronan have as a basis for calculating how investments pay off by looking at cash flow analysis in initial stages which also depends on the scale of the

investment. Vasakronans calculations also have consideration for possible future investments.

4.1.3 Non market strategies

“It is important to understand each other (municipality) when communication how the projects should be structured” - Magnus Tenberg.

Vasakronan evaluates different type of actors differently, and the municipality is one of the public actors Vasakronan collaborates together with, other public actors are for example Trafikverket (The Swedish Transport Administration Office), because some project affect the cities infrastructure. Vasakronan also collaborates with other private actors in different areas, with the purpose of creating a larger contextual framework for large projects where more than one of the actors are involved. In result this means that Vasakronan are active in urban

development, and creates urban areas for humans and companies to enjoy visiting and living in.

In regards to urban development, the relationship with the Municipality of Gothenburg are essential since Vasakronan’s vision and strategies are entangled with the municipalities planning

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of the area and their own vision. Therefore if Vasakronan strives for success in the project, it's important that the visions connects with each other and both Vasakronan and the municipality works toward the same goals with the project. - As explained by Magnus: “Absolutely, the relationship between us and the municipality are important since we need to understand each other, and us as an private actor can help to contribute towards their goals”.

In urban projects/real estate development, it is important for Vasakronan to distinguish the different stages in the development of the area. In the initial stages, a lot of work and planning revolves around the “project plan” which the municipality have responsibility for.

After the first stage a lot of the planning and work has already been made by regulatory bodies (Municipality, and the Swedish Transport Administration Office). In the second stage of the development process, Vasakronan works more independently and only have reconciliations with the municipality, this communication revolves around technicalities, operationalization, and executions. The last stage which is during the execution of the project/s there’s also

reconciliations.

The merge of AP Fastigheter and Vasakronan

“We are owned by AP Funds 1 to 4, which means that we are part of the swedish pension system” - Magnus Tengberg.

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Vasakronan was historically public-owned and existed in that time as an subsidiary of the Ministry of Industry (Näringsdepartementet). AP Fastigheter is owned by the AP Funds, and there is a difference of general public-owned companies and Vasakronan according to the interviewee. “Generally in public owned companies there’s often politicians active as board members and political directives that affects the business activities in interests of the

government”. The AP Funds is also a branch of the Swedish Social Insurance Ministry

(Socialförsäkrings departementet), which consequently consists of 7 AP Funds, Vasakronan is owned by AP Funds 1 to 4. The vision of AP Funds 1 to 4 is to invest for example the billions of SEK towards something that will generate a yield e.g real estate, stocks, companies, and

obligations. All of this combined creates the real estate company Vasakronan, however the government could instead spend capital on shares in the stock market or shares in other real estate companies. However this is something that are connected to our goal of having a 0.5% higher yields on investments than the rest of the industry. - On a 10 year cycle, Vasakronan delivers money that consists of the yields back to the AP funds, Vasakronan is one of the companies which historically have delivered substantial amounts as well.

One thing to note is that even though the involvement of Vasakronan and AP Funds there is no politicians in the board of directors, the board of directors consists of the CEO’s of the respective AP Funds. The fund ownership of Vasakronan differentiates the organizations incentives

compared to other real estate companies. Vasakronan also differs from competitors by being a sustainable long-term actor in the market, e.g: some other actors does not look at the property development from a broader perspective, and only focuses on short-term profit purchase/sell

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processes where they focus when to do a exit. Vasakronan as an actor have the opportunities to both develop and be active in present time, commit towards customers daily needs and

understanding of how to help them become better long term. “The good city” means that people and companies prosper. There’s also other actors that work similarly to us, however it's not that many.

4.1.4 Profit maximization

“We do not differ much from others actors in the sense that we strive for high yields and profits” - Magnus Tengberg.

Vasakronan does not loan separately from project to project, the strategy is to borrow a percentage of the whole companies assets as a collateral. Since Vasakronan is the biggest real estate owner in Sweden this fact translates into that the company also have the highest amount of loan to value ratio, however not in percentage as a measurement. The strive is to make areas more attractive by making a city district more alive. This goal is achieved by making the area safe, attractive and a popular place to visit, this will eventually lead to higher rents which leads to higher profits, resulting in Vasakronan winning in the long run. Vasakronan’s solidity is at 41.51% (2017) and net profit at 232.12% (2017).

During the process of choosing a project to invest in, Vasakronan looks at investments and projects during the decision stage, when Vasakronan proposes an investment. The evaluation towards a number of other alternatives are conducted, this results in having to make a decision

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between 1 to 3 final alternatives which gets a final evaluation before the triggering decision. Consequently Vasakronan analyzes the outcomes if they choose a particular decision, the best theoretical which can be calculated is the alternative Vasakronan believes to have the highest yields, this is in line with the vision of being an long-term actor, and grants the benefit of strength to act differently in different economic cycles with internal firm capital.

Historical findings of Company B

The second company is a smaller real estate developer, real estate owner also operating in the Gothenburg, Halland and Bohuslän.

From the second interview we conducted that the municipalities have a much larger saying in how the real estate firms operate than we previously assumed, the municipalities are able to influence the direct design of the buildings, width, height, length etc to not violate regulatory frameworks but also to make them fit into what the environment currently looks pre

construction. The second interviewee also explained how extensive value creation can be achieved by collaborating closely and thoughtfully with the correct responsible persons from municipalities, thus creating opportunities both for societies interest as well as the economic benefits for the firm.

4.2 Interview

Company B

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area of Gothenburg, Bohuslän, and Hallands Län. The interviewee has several years of experience in the real estate industry, both in industrial and residential real estate. The interviewee also have several years of experience as an entrepreneur, consultant, CEO and Board Member in the real estate industry.

4.2.1 Firm environment

“We are operating in Hallands, Bohus, and Västra Götalands regions” - CEO, Company B.

Company B, is active in the west coast of sweden including regions such as Bohus, Västra Götalands, and Hallands region. Company B views the real estate industry current market opportunities as bright, there are multiple areas within the Gothenburg, and Halland region experiencing extensive growth due to infrastructural developments leading to increase in jobs and inhabitants resulting in higher need of office and living spaces. According to the interviewee company B operates in a similar environment to Vasakronan, which consists of free market with elements of regulations through the municipalities and other involved regulatory bodies such as other Swedish ministries. (Trafikverket, Fastighetsverket etc).

4.2.2 Market strategies

“For us it is important to look at the whole area where we invest because it is more beneficial to have focus upon the long run whereas a sole building is not” - CEO, Company B.

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Company B’s strategy consists of refining residential real estate through a subsidiary, the real estate portfolio consists mostly of condominiums but also a smaller percentage of rental apartments. Since the real estate industry is capital intensive Company B work to increase efficiency by analyzing capital spending carefully before exploitation in respective projects. The transformation of land exploitation to construction stages creates value, in the long term this benefits Company B who also diversifies assets by having a small percentage of real estate portfolio in rental commodities concentrated in attractive central areas which results in the compound interest effect. The value increase slowly in initial stages of the investment but as the interest increase the rents increase simultaneously with the market. The Interviewee exemplifies this statement by mentioning “Camden, London; where gentrification is conducted in hip/trendy areas where initially the rental prices are low however some actors purchase the land renovate the area and the rental prices increase dramatically”. The strategy of refining old buildings/real estates, through renovation leads to profits being accumulated through the profits of the rents and the new market/assets value of the real estate, - so called double strategy.

Company B argues for the importance of maintaining a broader picture throughout development projects when conducting investments. Because if the project does not contribute to its

surroundings/city/area, the financial value exists solely within the lone real estate project/ building and there's a loss in not seeing the whole area as an investment. Company B’s vision is to “develop the city soul” where the entirety of the area of focus leads to a better investment both economically and socially.

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4.2.3 Non marketing strategies

“We can have third party consultants in areas such as engineering, city developers where they also make sure to communicate the importance of our goals with the project” - CEO, Company B.

Company B’s main collaboration partners are private customers, municipalities, and commercial companies. The relationship is as important when working with either residential real estate as well as commercial. The municipalities needs to be aligned with the vision of the development of the area to achieve greater value creation in both cases. Company B’s development process is entangled closely with the municipality, the first stages involves consultants to construct the vision for the area, the second stage involves the municipality to give political guidelines to the consultants which lead them to summarizing the respective projects. Other actors involved in the process (Fastighetskontoret) as well as representatives from the municipality. All actors operating in the industry according to Company B, final goal is to generate value for its shareholders and thus generate an lucrative opportunity of investments.

4.2.4 Profit maximization

“Some actors are only here for short run investments and make exists fast, we want to be a sustainable long run actor which will lead to continuous incomes” - CEO, Company B.

Company B mentions that loans upon the companies assets are very usual and a very common strategy, especially in the real estate industry, company B utilizes it themselves. According to the

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interviewee the banks most often are able to accept an loan to value ratio (LTV) upwards to roughly 70%. “It is a common strategy for both larger and minor real estate firms when looking to expand to increase the loan to value ratio of already existing and established assets to gain resources for expansion.” However loaning upon assets to gain money for further expansion are more difficult for minor companies as the perceived risk from the banks are much higher, when Company B utilized this strategy it was rather time consuming to find a investor/bank willing to give a loan. The strategy of refining old buildings/real estates, through renovation leads to profits being accumulated through the profits of the rents and the new market/assets value of the real estate, - so called double strategy, leading to maximization of profits.

Company B was involved in a controversial real estate project in Halmstad, where internal conflict feuds, and conflicts arose in the organisation due to actors involved in the city

development project had different visions, where the area of interest of the actors involved went separate ways, eventually leading to the bigger stakeholders in the company conducted a hostile takeover.

5. Analysis

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This chapter consists of four sections. Firstly the authors contrast and evaluate the empirical findings in the same way that the operalization section shows inspired by (Fisher 2010).

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collaborate point of view.

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5.1 Firm environment

In regards to geographical markets, there’s a similarity between the company investigated upon; both are operating and navigating business activities in the Greater Gothenburg area, - however Vasakronan is more present in the national market than Company B, and have a larger portfolio of real estate centralized in central areas in the major cities in Sweden, whereas Company B have a strong local presence along the west coast of Sweden and have a more diversified portfolio of real estates both geographically and locally;

● Company B have a portfolio of estates in; Bohuslän, Västra Götalands Län and Hallands län, in cities such as Gothenburg, Trollhättan and Halmstad.

● Vasakronan have a portfolio of estates in; Stockholm, Gothenburg, Malmö and Uppsala.

The constellation of Vasakronan and Company Bs organisational structures differ, in the form of ownership models, e.g Vasakronan is a public traded company whereas Company B is private. Vasakronan have higher requirements for transparency, and compliance due to the state funds (AP Funds) being a majority owner of Vasakronan AB. And as a result of AP Funds ownership in Vasakronan, the board of directors incentives and goals set for the organization are primarily high required returns due to the fact that the swedish pension system are dependent on high yields. This also conflicts the transaction cost economics theory in regards to market conditions

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whereas state ownership operating in the private market can bee seen as conflicting with the “market rules”. The AP Funds ownership also creates leverage power in negotiations with regional and regulatory authorities. There can also be found that the firms investigated upon utilizes domestic non market strategies which is displayed by looking at how the firms

environment is constructed: The external actors in both of Vasakronan and Company B’s firms environment such as representatives from the municipality have different communication processes with the different actors active in market e.g and this communication is affected by factors such as volume scales on projects, or projects faced with certain threats or special

circumstances for example engineering or infrastructural problems. The communication, and the project plan for respective projects can be adjusted resulting in that Vasakronan and Company B utilize the local municipality representatives to communicate different types of reshapements of the respective project plans where some firm suggestions gets approved. The ever changing environment the organization are currently operating in is with the ambition to secure organizational prosperity. In the findings Company B have concentrated their operations to geographical locations specifically western parts of Sweden where they have an actual

comprehensive insight in region growth, in the case of Vasakronan they have concentrated real estates limited to the domestic national real estate market.

Every project is unique and negotiable, this inherently means that the municipality have the authority to decide, for example; volumes, exterior and interior design, and sizes of the buildings, which in turn according to Adam Smith’s “Invisible Hand” - this does not achieve the conditions of a free market where self-interest consumers have the possibility to decide the products, in this

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case real estates. And since the volumes of the projects differ and may not reflect the manipulation of supply and demand curves which is not in line with the invisible hands description of a free market.

5.2 Market strategies

The goals for Vasakronan’s investments is in one way similar to all the other companies, to earn high yields on the investments made.

Vasakronan and Company B distinguish the differences between their respective needs, - when their clients grow their estates become more attractive. Company B work more towards

satisfying shareholders, analyzing capital spending and investments carefully. However even though both actors have different areas of specialization, there can be found similarities with Company B and Vasakronan visions: the development of the citysoul, and the good city. - Both focuses on a broad analysis of the area of estates whereas the long-term winner will be concluded through making the entirety of the area attractive. Mutually both see the connection of attractive areas and increase in rents in respective estates leading to higher yields/profits in line with maximizing profits for the organization. This is one way of achieving “profit maximization” whereas different actors in the market tend to purchase a project-short term, invest then as fast as possible make an exit when the requirement for the returns are achieved.

Several findings in how firms manage their capital through different strategies were found and observed throughout the data collection. One of the first findings during the interview was that

How real estate firms non-market strategies shape competitive landscapes in the private real estate sector