The agency problem and New Zealand's listed property sector : A dissertation submitted in partial fulfilment of the requirements of the degree of Master of Property Studies at Lincoln University

Abstract

This research examines the extent to which New Zealand's listed property vehicles (LPVs) are characterised by significant agency conflicts. A review of the agency literature identified four generic agency problems (effort; horizon; differential risk preference & asset use) while the real estate literature revealed other agency issues specific to real estate assets and LPVs. From a review of LPV prospectuses and the print media coverage of LPVs it was not possible to conclude with certainty that the generic agency problems identified in the literature are present in New Zealand's LPVs. However, the evidence was much more clear-cut in terms of specific real estate agency issues. The major agency issues that the real estate literature identified as present in U.S. LPVs were also found to be present in New Zealand vehicles (management compensation, sponsor control, self dealing, resource allocation). The key agency issue was management compensation, its basis and quantum over time. Sponsor control issues centred around institutions exiting direct property, but maintaining ongoing control of the LPV through the management company and a significant minority holding. Associated with this was a self dealing issue tied to the selling of direct property into a listed vehicle based on value arrived at via valuation rather than transaction. Resource allocation issues also arose for those managers with interest outside of the LPV. As LPVs have performed below expectations during the 1990s disquiet among investors has grown. A number of measures have been utilised to minimise agency problems in LPVs. The key thrust has come in the form of major shareholder activisim with the focus on management compensation. It would seem however, that many of the agency problems present in New Zealand listed vehicles are structural in nature. For the moment the market seems to be prepared to live with the existing structure in the belief that an efficient market should price the relative severity of conflicts on a stock by stock basis.