Napster, Facebook, CoStar. What do these platforms have in common? They all made use of shared information, provided by their users.
In the first case, Napster enabled the free sharing of music and other media files, which was ultimately deemed to be illegal. In the second case, Facebook provides a free platform where users share personal information, interests and activities and can see the same about other users. More relevant to real estate, CoStar charges for a platform for commercial property investors to see information on transactions, provided they too give their information to the platform.
In each case a highly valuable service was delivered as a result of enabling people to share information.
So what is information sharing, why is it valuable, and is it being done enough when it comes to the property market?
A market for lemons?
Anyone who took a basic economics class will probably remember “Akerlof’s market for lemons"(1). While no actual lemons were bought or sold, the term “lemon” was used to denote a sub-standard asset; for example, a car.
The theory holds that in the sale of a used car it is virtually impossible for the buyer to have the same information as the seller. This gives the seller an advantage as they can dress the car up as a great bargain. (“Just one prior owner: a little old lady who only drove it to the local shops!”) Then, no sooner than the purchase has been made, the wheels fall off…
In part, this imbalance of information held by the buy side and sell side of a transaction is what we at REalyse are here to redress. Enabling both buyers and sellers to have better information is also why companies like Bloomberg were so successful in transforming the financial services sector decades ago.
That said, it is nigh-on impossible to achieve a perfect balance of information on both sides. Which leads to the second economic theory of the day, the “efficient market hypothesis” (2), which basically states a universal truth: It is possible to make more money by knowing more, knowing faster or acting faster than others.
Accepting that the buy side of a transaction is at an information disadvantage, and that more information allows for greater returns (3), let’s think about a development transaction. The buyer (ie the developer) has a concept of what they want to do with a particular building or piece of land. The seller simply wants to receive cash at a rate higher than their required rate of return, or the highest offer. The information required by the seller is limited: “What is my rate of return?” “What are the offers?” Whereas the information required by the buyer is considerably more complex, and requires understanding both supply and demand in considerable detail.
The elastic’s gone!
There are a vast number of factors that go into understanding a market, submarket and the overall supply and demand for a product, many of which are included in what we offer at REalyse. These factors are expressed through the price of properties, and the supply and demand for properties. The changes in either supply or demand relative to price are known as price elasticity. In the UK, it is estimated that both supply and demand are relatively inelastic, meaning they don’t change that much with price. This is largely due to the past 30 years of poor policy decisions resulting in constricted supply (ie supply can’t change that much) and continued population growth (ie people always need somewhere to live, so it’s always in demand).
While in most normal markets, an increase in price leads to an increase in production (as more producers come into the market), in UK housing it does not. It is estimated that every 10% increase in price leads to only a 2.8% (4) increase in supply. Conversely, a 2.8% increase in supply should create a 10% decrease in price, for a given level of demand. On the demand side, increases in price have a stronger negative relationship with demand. Every 10% increase in price leads to a 5% decrease in demand (5).
The chart above has been plotted using actual measures found in the studies noted in the footnotes.
Let's say that several property developers, using existing information, have identified that a particular location presents an opportunity. They may all begin to make plans to develop in that location; they may all independently make sealed bids to various land and property owners, perhaps even to the same owner. They act without information of what the others are doing and often without a good understanding of what the market is really doing. As time and the market move further from the point at which they started, the risks potentially become greater and so may the financial sensitivities.
And then the day comes at which each of the developers begins to market their product. Only to discover that the others are also engaged in the same market! Their meagre increase in supply puts a significant pressure on prices, or rents.
For example, there are approximately 41,000 residential properties in E14 (Canary Wharf): a 2.8% increase is about 1,150 units. A single development in the area may make up that amount itself (6)!
The chart below shows the past seven years of rents and rental supply around Canary Wharf. Whenever supply went up significantly, rents fell; whenever supply decreased, rents increased. Supply and demand in action!
These are not insignificant changes and could have highly damaging, or highly beneficial, impacts on property developers looking to sell or rent their product.
Having advanced information about who is doing what, where, and how well, could very well make or break a development, and the way to get that information is to give that information.
So why aren’t we a little more open to sharing?
Reciprocity, first movers and cartels
Numerous social studies have shown that agents (people) who reciprocate outperform those that either trust blindly, or trust none (7,8,9). Those that aren’t able to trust aren’t able to form beneficial cooperative networks, and those that trust everyone who comes there way are exploited. The residential real estate market doesn’t fit neatly into any one category. There are those that are trustworthy, those that can’t be trusted, and those trust too much. However if the market is to move towards a greater level of transparency and sharing of information, then what has to be done?
Someone has to be the first mover. Like a playground bust-up, someone has to be the first kid to cross the playground and shake hands. In doing so, they take a risk. However, ultimately they and everyone else stands to gain. With greater levels of information sharing regarding what developments are under way, where, and information around take-up and absorption, it would be possible to take some of the edge off the ‘bust’ side of boom-and-bust. There would still be plenty of ‘boom’ to be had, and if you were late to the party, you’d know about it well beforehand and save a lot of time and money.
Access to information provided by other competing companies could help to shape and advise delivery of product to better fit the market. Imagine you’re building 200 one-bedroom units and construction has just begun. Wouldn’t it be great to know that your competitors are going to leave the one-bedroom market alone in that area, as you have it covered, and perhaps they’ll concentrate on different units or a different location? On the other side, we’re all familiar with the frustration of seeing a competitor building the same thing as you on the other side of the street and the pricing war that can ensue!
So what’s to lose?
Information sharing may not be for everyone. Competitors may try to exploit the information they have to your detriment, although in most cases it would likely be to their detriment as well. It may lead to uncomfortable conversations with investors or lenders if they have additional visibility on uptake, although most reporting standards now require such information anyway.
Really, there isn’t that much to lose. Can you imagine airlines keeping their planes off radar for fear of competitors knowing what routes they’re flying?
Open up a little! It’s in all our interest.
Figure 2: CPPR, Discussion Paper No. 20, October 2009
'REalyse (Treex Ltd) does not provide any form of investment advice or property advice or any other regulated function. Note that any information or opinions, presented or referred to in this article are for information purposes only. Any actions taken by a reader are done entirely at their own discretion, you are responsible for your own investment decisions and hold Treex Ltd harmless from the results of any such decisions'. Whilst every effort has been made to ensure the accuracy of the information herein some inaccuracies may remain.'