Work on typical business issues from the real world of real estate – together or against each other. This was the task given to students enrolled in the Master of Science in Real Estate program at the Steinbeis Transfer Institute of Building and Property Industry at Steinbeis University Berlin. Drawing on the principles of game theory, the students developed “ideal” success strategies. It was all part of strategy training using a business case study. The underlying idea of the management training comes from a business game called Real Investor that was developed at the EURO Institute of Real Estate Management in Zug, Switzerland.
The students were divided into teams and given a case study based on an example from business: a real estate portfolio. The teams then went through a typical, albeit simplified, sales process. The seller’s task was to figure out the most successful strategy for selling the real estate portfolio, simultaneously maximizing the selling price. Attention had to be paid to the competitive nature of relationships between sales leads. Once buyers and sellers had key information about the portfolio and their individual profit goals, they entered into intensive negotiations.
The real estate experts became embroiled in a kind of “co-opetition”, part cooperation, part competition. When the strategy coach analyzed the play of both parties and looked at the result of the negotiation, he immediately identified how rational decision-makers become. The actual transaction price can be calculated using an economic equation dictated by mutual interactions between both parties. For the sale of a real estate portfolio to work, it is crucial to win sales leads who are able to add the most value to price negotiations. The price negotiation tactics adopted by the sales leads is generally dictated by their capital costs. What this means is that the sellers of a real estate portfolio can make a profit if they can find sales leads with cheaper capital than they have. If the capital costs of the buyer are lower than the market capitalization rate (“cap rate”), the selling price that can be achieved will be higher than the market value of the portfolio. The highest selling price will be paid by the buyer with the lowest capital costs. Because of the competition between the sales leads, the lower the second lowest capital costs of the buyers involved in the negotiation, the higher the buying price will be. The key to success when selling a real estate portfolio is thus to invite at least two sales leads to bid on a sale. Their capital costs need to be significantly lower than the cap rate. The transaction price will then be considered fair by both parties, as it will be significantly higher than the market value.
As the training progressed, the students worked on a success strategy for more complex business situations. This time, they had to develop a logistics property at Schiphol airport in Amsterdam. The owner of the land, Schiphol Real Estate, needed a business model that would allow them to add value by developing the property without having to invest any of the owner’s own capital. The students were introduced to the Brandenburger and Naleboff’s strategic behavior model PARTS, which results step by step in a more successful strategy.
Each team chose a role to adopt during the game. The result – a strategy for Schiphol Real Estate to adopt – was broken down into two parts. First, found a development company, with a logistics company acting as the anchor tenant, then develop a tailor-made building. Second, sell the development, including tenancy agreement with the logistics company, to a company with plenty of capital. During the game, the teams also worked out a financing model involving a property company set up as a “special purpose vehicle.” After the one-day strategy session, the students had to demonstrate their newly acquired strategic knowledge and skills in an exam. Their task was to organize a network of services provided by a real estate company and identify key customers, suppliers, competitors and business partners. They then had to establish a win-win collaboration with business partners and draft strategic plans for the financial success of the business.
The students involved in the business game clearly enjoyed it. They learned a great deal about commercial success within their own profession and can now play through the strategic implications of changing business scenarios – and make changes to their own advantage. This business game is a perfect example of the interactive learning approach used at the Steinbeis Transfer Institute of Building and Property Industry. Not without coincidence: In many areas of the real estate industry, there is growing demand for analytical, valuation-based, decision-making skills rooted in scientific knowledge. Marrying the ability to understand methods and apply them, seeing the impact of one’s own decision in the “safe” environment of a business simulation, drafting alternative strategies and trying them out – all these foster understanding that will come in handy in the years to come. This interactive approach to learning also gives students quick feedback and insight into themselves. For companies and up-and-coming managers, this is also a core requirement of future training.
Vis. Prof. Dr. Jürg R. Bernet
EURO Institute of Real Estate Management Cologne and Zug (Switzerland)
A strategic business game is where participants are put into a dynamic situation in which the success of the decision-maker depends on the choices of others. The science of commercial behavior in dynamic situations is called game theory. The Real Investor business game is “real” in terms of its effect on actual success. According to the “The Right Game,” a bestseller written by Brandenburger and Nalebuff, the five components of the PARTS strategic behavior model are:
Players – Which business partners should be won ever?
Added Values – What values should be added?
Rules – Which arrangements will be made?
Tactics – Which information will be used?
Scope – Which borders will be set?