The investment decision process of real estate owners : How to determine property uses in development projects

Abstract: Mixed-use developments have shown to have positive effects on areas’ attractiveness and have thus turned into a planning principle in Swedish urban areas. To ensure that a mix of property uses is obtained and that a sufficient amount of housing is built, many municipalities use constraints in the detailed development plans. Despite the many positive aspects of mixed-use developments there are also challenges. Real estate owners are the long-term investors and which projects and property uses they choose to develop are a matter of risk. Real estate development is characterized by complexity and uncertainty where the end product should result in leasable space over time. In order to succeed, a real estate owner needs to make correct forecasts of future demand and supply for the different property uses. The property owner also needs to manage risk related to detailed development plans, permits, flexibility in the design, construction and lease. The aim of this study is to explore how property owners decide which property uses to include in development projects. The objective is to identify the most important factors behind the decision and to contribute to the body of knowledge concerning the investment decision process of property uses in development projects. The study uses a qualitative method with an abductive approach where semi-structured interviews with 11 of the largest real estate owners in Stockholm have been conducted. The information from the interviews resulted in a general description of the process real estate owners undertake to decide which property uses to include in development projects. The most important factors behind the decision were shown to be the demand in the area, the will of the municipality, the preconditions of the site and the profitability analysis of the project. The detailed development plan, controlled by the municipality, is what ultimately regulates which property uses that can be developed. Real estate owners can negotiate with the municipality when new plans are developed over which property uses to be included, but in the end it is the municipality who has the final say in the matter.