Industrial Land and Property Markets: Market Processes, Market Institutions and Market Outcomes: The Dutch Case

Abstract

Outcomes of land and property markets may be understood by studying the effects of (interventions in) market processes and market institutions. Many studies have paid attention to the meaning of institutions for land and property development processes. The standpoint of this paper is that changes in the institutional order of the market may be considered to arrive at more desirable market outcomes. It will be argued that institutional economic theory offers a valuable theoretical approach to bring forward possible interventions in this institutional order. This theoretical approach to land and property development processes is applied to analyse one specific market outcome, the spatial layout of industrial parks in the Netherlands. Starting from the analysis of the oversupply of industrial land and the deterioration of existing industrial parks, the paper focuses on possible interventions to change the institutional order that should lead to more favourable market outcomes. For the present submarket for industrial land (building plots), a number of interventions are discussed to internalize the externalities that occur in this market and to increase the number of suppliers. Additional interventions are proposed to create a “new” submarket for new leasehold industrial property, which is almost absent in the case of industrial estates.

Notes

Here we look particularly at the government as a regulator and legislator not as market actor (e.g. a land developer) comparable to any other market actor. We recognize that we cannot speak of “the government”, but that it consists of a variety of public bodies. In our case study we will particularly distinguish between the local, regional and national level.

This counts for both old institutional economics and new institutional economics (Buitelaar, 2007).

In this paper, we distinguish between industrial land (land that has been made available for industrial use), industrial properties (properties/buildings that are in use by industrial firms) and industrial parks (areas that have been designated for industrial use and give room to a certain number of firms with their properties). Industrial land is, in most cases, only available at dedicated industrial parks. Some of the industrial parks may also contain commercial functions (offices, retail) and may then come close to what we would call a business park. The empirical work in this paper refers to all industrial parks (some of which are still under development) that have been defined as such in a national database that we have used. Those parks have in common that the primary use is industrial.

Note that info in IBIS is provided by municipalities. There is some discussion about the rightness of the data, because municipalities are believed sometimes to exaggerate the problem of deteriorated industrial parks for strategic reasons (i.e. to receive more national governments grants).

We do not know which percentage of those plans have already been implemented.

On 1 January 2007, 84% of all available land on industrial estates was owned by municipalities. Only 16% of the available building plots was owned by private companies (PBL, 2009).

This does not mean that those properties do not meet with industrial firms' demand. However, we suppose that the quality of the major part of those properties is relatively poor. This is supported by evidence from rent levels on the industrial property market, which are low (for 42% of leasehold industrial property, rent levels are even below €50 per m², per year) (Stec Groep/NVB, 2005).

It is hard to prove whether these developments can really be seen as externalities (which is the case with most externalities). However, at least the externalities argument seems to be supported by the national Taskforce Report and the Cabinet's response to it (THB, 2008; TK, 2008).

For instance, it may be more efficient to assign property rights to the inconvenience caused by an airport and leave the solution to negotiations between the airport and its neighbours, than to regulate this by some kind of government intervention. In case of well-assigned property rights to such nuisance, the airport can negotiate with its neighbours about, e.g. financial compensation, the reduction of nuisance or, in an extreme situation, decide to move to another location if the size of the financial compensation would be insurmountable for the airport. If the negotiations do not lead to an agreement, the parties involved can go to court.

We are aware of at least one example of such a regional agreement in the Netherlands. A number of municipalities in the Achterhoek (in the eastern part of the country) have agreed to pay a redevelopment fee for every hectare of newly developed industrial land. The fees go to a regional fund that will co-finance restructuring projects for existing industrial parks.

Barzel (1997, p. 3) defines the principle of residual claimancy as follows: “(t)he residual claimant to, say, an apartment house is its economic owner in that he is able to gain (here by exchange) from an increase in the value of the building, whereas he loses from a reduction in that value. Being its owner, he is motivated to take any action that will, net of its cost, increase the value of the property”.

Earlier research showed that on average the investments in land and property are only 1.8% of the total investments by industrial firms.

The analysis in Sections 2 and 3 shows that industrial land is not a pure type B good, but is in fact treated by municipalities as such.

In the Dutch perspective, the size of this potential demand is substantial. In comparison, the size of newly constructed office space varies between 750,000 and 1,500,000 m² per year, while the size of newly constructed retail space amounts to circa 250,000 m² per year.