To own or not to own?: property decisions of SME entrepreneurs

ERES 2010 MILANO CONFERENCE

Sussie MorrishDepartment of ManagementUniversity of Canterbury, NZ

Deborah LevyDepartment of PropertyUniversity of Auckland, NZ

Acknowledgement: RICS

Presentation Format Introduction Background to the study Methods Findings Discussion Implications

Introduction This study looks at business decisions relating to property within the

context of small to medium size enterprises (SMEs), which has received little attention in the academic literature.

  Property is one of, if not the most valuable asset in a business operation.

This becomes even more important in SME settings as they are often used as leverage to access finance.

Findings from the study will go some way towards better understanding of how property contributes to the success or otherwise of SME operations.

Flow-on effect to wider economic prosperity. SMEs are regarded as the engine of many economies

Introduction In New Zealand there are currently close to 350,000 small

and medium enterprises compared to 1,600 enterprises employing 100 FTEs or more.

The most recent Statistics New Zealand report shows that:Approximately 90% of enterprises employ 5 or fewer people and are considered SMEs

From 2001 to 2006, SMEs accounted for approximately 60% of all new net jobs in the economy

Background Evidence from an exploratory study shows that portfolio

entrepreneurs use property strategically throughout the different stages of their business operations.

Knowing how and why they do this will enhance our understanding of the strategic significance of real estate to small to medium size business.

While big corporations are conspicuous in their ownership and management of commercial properties, SMEs are less visible.

There is very scarce literature at the interface between property and SME research.

Research Problem

SMEs are often constrained by the scarcity of resources and property (i.e. bricks and mortar) still remains a valuable currency that could potentially assist SMEs in ensuring the growth, development and in extreme cases the survival of their business.

Understanding the dynamics that exist within this context has great practical implications for theory and practice.

Property-related literature Studies into such issues as the optimal allocation of

real estate in institutional investment portfolios, highlight the importance of property

as collateral for loan purposes to assist in the diversificationto assist in the optimal allocation of an

institutional portfolioas a hedge against inflation as a production resourceas a strategy for enhancing competitiveness

Background to the studyA study by Morrish, Levy and Dong (2009) found that SME

portfolio entrepreneurs use property strategically in business decision making.

These decisions relate to finance, building space and other business related issues.

It was evident that portfolio entrepreneurs incorporate both business and personal wealth strategies in their approach to property ownership.

The role of property

Findings of previous studyFinance and investment purposes

Business related purposes

Personal reasons

Raising capital Real estate asset to run the business from

Assist family member to enter a business

Accumulating profit As a core business Acquiring the family home (family assets)

Diversification and risk reduction

Exit strategy Keep property assets for retirement income

Taxation reasons Providing space for other business activities

Income production Entry into business

The role of propertyFindings of previous studyEntry strategy Mid strategy Exit strategy

Wealth creation Complementary to core business

Retirement income

Collateral for loan purposes

Family inheritance

Methods

Two-part study consisting of:

Survey: 194 New Zealand SME entrepreneurs

6 in-depth semi-structured interviews with entrepreneurs

Summary of survey resultsApproximately 50% (n=89) of respondents owned

property related to their business

65% said property ownership has had an impact on business decision making

Of those that owned business-related properties, approximately 90% said property had been a sound strategic business decision

Property and life cycle stage

Pre-venture: Long-term investment; As a core component of a business; For income production

Operational Life: For business accommodation purposes; Long-term investment; To accumulate profit

Post venture: Long-term investment; Retirement income, To accumulate profit;

Overall: Long term investment; business accommodation purposes; to accumulate profit; retirement income

Phase two: Interview resultsReasons for property purchase and development

varied across the different stages of business operations.

Suggest that ownership of property is not only impacted by business strategy but also additional external factors, lifestyle and personal considerations together with specific property investment criteria.

Factors affecting property decisions

Personal/family issues

Business operations

Financial considerati

ons

Factors affecting property decisions

Personal/family Issues:

RetirementSuccession

Financial Considerations:Initial financeInvestmentBank policy

Property and Life cycle stages of SMEs

operational life

exitentry

Results: strategic impact of property ownershipsPersonal/emotional

“Owning your own home is embedded in kiwi culture , it gives a sense of stability and encourages more of a long term view. More for emotional reasons than pure investment criteria”

Property is somewhere to live… you my not make the top dollar on it , but you are not going to be disappointed..you’re basically translating those assets to cash to fund your retirement”.

Financial “Investing in property is a waste of capital from a business perspective” “I need to own the building because there is no other way I’m going to get money from the

bank”.

Business “.. You’ve got control over what you can do with it, whether you can expand and how to configure

it”

“Your patient base comes generally within a five kilometers of where you practice”.

DiscussionThis study advances theoretical understanding of the

interface between SME operations/processes and strategic property management and development, enhancing our understanding of the value property brings to business.

Triangulation method has allowed insights into the behaviour of SME entrepreneurs with regards to the role of their property assets

DiscussionCombination of findings from the finance literature and the

research studies relating to entrepreneurial behaviour

Importance in understanding the life cycle effects of property investment

Important to understand the influence of personal requirements in business decisions

Implications and further research In addition the results of this study provide practitioners

with a deeper insight into the way SMEs view, acquire, manage and dispose of property.

Setting up a property fund for SMEs?Banking policyFiscal policyProperty fundsProperty development