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Size effects and economies of scale in European real estate companies

Author

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  • Ambrose, Brent W.
  • Fuerst, Franz
  • Mansley, Nick
  • Wang, Zilong

Abstract

This study investigates scale economies in European real estate companies. We examine the effects of size on revenue, expense, profitability ratios and capital costs using panel data regression. We find that larger real estate companies in Europe are able to generate higher revenue per unit of company size, incur lower costs and produce higher returns. Net Operating Income ratios and return ratios increase while Selling, General and Administrative expense ratios decrease with the size of a company. However, we do not find evidence that larger companies have lower cost of debt or lower weighted average cost of capital. From our analysis, it is evident that particularly small firms can reap substantial economies of scale as they grow. However, the benefits of further growth tend to be much more modest for larger companies. Given REITs are on average larger than comparable non-REITs this may explain why REITs have lower economies of scale in expenses and revenues than Non-REIT real estate companies.

Suggested Citation

  • Ambrose, Brent W. & Fuerst, Franz & Mansley, Nick & Wang, Zilong, 2019. "Size effects and economies of scale in European real estate companies," Global Finance Journal, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:glofin:v:42:y:2019:i:c:s1044028317304349
    DOI: 10.1016/j.gfj.2019.04.004
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    References listed on IDEAS

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    Cited by:

    1. Eduard Hromada & Tomáš Krulický, 2021. "Investing in Real Estate in the Czech Republic and Analyzing the Dependence of Profitability and Technical and Socio-Economic Factors," Sustainability, MDPI, vol. 13(18), pages 1-12, September.
    2. Mansley, Nick & Wang, Zilong & Weng, Xiaoyu & Zhang, Wenjing, 2023. "Good growth, bad growth: Market reaction to capital raising for REIT expansion," International Review of Financial Analysis, Elsevier, vol. 86(C).
    3. Mansley, Nick & Tse, Tiffany Ching Man & Wang, Zilong, 2020. "Risk classification of Asian real estate funds and their performance," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    4. Sofia Fonseca & Maria João Guedes & Vítor Conceição Gonçalves, 2022. "Profitability and size of newly established firms," International Entrepreneurship and Management Journal, Springer, vol. 18(2), pages 957-974, June.

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    More about this item

    Keywords

    Scale economies; Size; REITs; Real estate;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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