(January 2010) Institutions in the Dutch industrial land and property market

Institutions in the Dutch industrial land and property market image
The aim of this paper is to increase the understanding of how demand and supply in commercial property markets are adjusted. Most quantitative models of commercial property markets , assume that property developers base their development decisions on the market signals provided by prices. Because development profits are a geared residual of property prices, the pattern of development profitability will reflect and even amplify that of current property prices. However, comparable results are obtained in analyses which do not include variables that affect development profitability, but assume that developers' expectations of profitability are primarily based on extrapolations of past development trends. Moreover Henneberry & Rowley (2002) demonstrated that habit-persistence is a better indicator of developer response than current price-taking, particularly in volatile market conditions. Therefore this paper turns to new institutional economics, which argues that - due to an overemphasis on price as the coordinating mechanism and a lack of attention of institutions - mainstream economists cannot understand markets properly. Mainstream economics does acknowledge the effect of institutions such as land use regulations, but it is difficult to incorporate these into quantitative models of the land and property market. Furthermore institutions are regarded as constraints on economic behaviour. Dequech (2006) calls this the restrictive function of institutions. Some strands within new institutional economics emphasize that that the market itself is an institution and that institutions provide information to the individual, including the indication of the potential actions of other economic actors. Referring to Hodgson (1988), Dequech (2006) calls this the informational-cognitive function of institutions. Thus, trough (informal) institutions, such as habits and routines, much more information regarding supply and demand can be transmitted, and other than trough price. In this paper, these ideas are applied to land and property markets by first demonstrating that price signals cannot be the dominant information transmitter in the Dutch industrial land and property market and secondly by presenting findings from a survey of how developers in the Dutch industrial land market decide to develop more land. It appears that most of these developers rely on informal contacts with local firms and extrapolations of previous trends. The aim of this paper is not to present a better general theory of land and property markets, then those derived from mainstream economics, but the opposite: to emphasize that theories cannot be applicable to all land and property markets (i.e. the Dutch industrial land and property market).

Keywords: industrial estates, property markets, institutions

References

Dequech, D. (2006). The new institutional economics and the theory of behaviour under uncertainty.
Journal of Economic Behavior and Organization, 59(1), 109-131.
Henneberry, J., & Rowley, S. (2002). Developers' decisions and property market behaviour. In S. Guy
& J. Henneberry (Eds.), Development and Developers: perspectives on property. Oxford:
Blackwell Publishers.
Hodgson, G. (1988). Economics and institutions: A Manifesto for a Modern Institutional Economics.
Cambridge: Polity Press.