Retail increases place attractiveness
HFI has recently launched its first working paper, “Retail and Place Attractiveness: The Effects of Big-box Entry on Property Values”. The study shows that the establishment of new IKEA stores has a positive and significant effect on housing sales prices. The effect is however not linear, but varies with the distance from the new store.
Opponents of big-box entry argue that large retail establishments generate noise and other types of pollution and a variety of negative externalities associated with traffic. Big-box advocates, on the other hand, argue that access to large retailers delivers not only direct economic benefits but also a variety of positive spillover effects and can be therefore considered a consumer amenity that increases the attractiveness of the entry location.
We use the entry of IKEA in Sweden as a quasi-experiment to empirically test the validity of these competing arguments and show that increased access to retail enhances place attractiveness (proxied by property prices) and that this effect is nonlinear in space.
Our results indicate that new IKEA retail areas increase property prices in the entry regions by, on average, 4.4% or 60,000 SEK (about 5,500 EUR). In addition, we observe an inverted-U relationship between access to the new IKEA retail area and property prices. While properties closest to the new IKEA retail area are not affected by the new entry, properties located 1.5 km away experience an average increase of almost 7%, reaching a maximum at approximately 2 km from the entry location and then decreasing smoothly to approximately 2% at a 10 km distance from the new IKEA retail area.
A possible interpretation of our results is that the positive and negative externalities from a large retail establishment such as IKEA cancel each other out within close proximity of the new store, but while the negative externalities are rapidly decreasing with distance, the positive are not.
This study was conducted by Sven-Olov Daunfeldt, Institute of Retail Economics and Dalarna University; Oana Mihaescu, Institute of Retail Economics; Özge Öner, University of Cambridge and Research Institute of Industrial Economics; and Niklas Rudholm, Institute of Retail Economics.
A special thanks to Hakon Swenson Stiftelsen for supporting this research.
The study can be downloaded here.