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Bias or rationality? The case of UK commercial real estate investment

Peter Byrne (School Real Estate & Planning, Henley Business School, University of Reading, Reading, UK)
Cath Jackson (Department of Town and Regional Planning, University of Sheffield, Sheffield, UK)
Stephen Lee (Real Estate Investment and Finance Group, Faculty of Finance, Cass Business School, City University, London, UK)

Journal of European Real Estate Research

ISSN: 1753-9269

Article publication date: 3 May 2013

2437

Abstract

Purpose

The purpose of this paper is to test the hypothesis that investment decision making in the UK direct property market does not conform to the assumption of economic rationality underpinning portfolio theory.

Design/methodology/approach

The developing behavioural real estate paradigm is used to challenge the idea that investor “man” is able to perform with economic rationality, specifically with reference to the analysis of the spatial dispersion of the entire UK “investible stock” and “investible locations” against observed spatial patterns of institutional investment. Location quotients are derived, combining different data sets.

Findings

Considerably greater variation in institutional property holdings is found across the UK than would be expected given the economic and stock characteristics of local areas. This appears to provide evidence of irrationality (in the strict traditional economic sense) in the behaviour of institutional investors, with possible herding underpinning levels of investment that cannot be explained otherwise.

Research limitations/implications

Over time a lack of distinction has developed between the cause and effect of comparatively low levels of development and institutional property investment across the regions. A critical examination of decision making and behaviour in practice could break this cycle, and could in turn promote regional economic growth.

Originality/value

The entire “population” of observations is used to demonstrate the relationships between economic theory and investor performance exploring, for the first time, stock and local area characteristics.

Keywords

Citation

Byrne, P., Jackson, C. and Lee, S. (2013), "Bias or rationality? The case of UK commercial real estate investment", Journal of European Real Estate Research, Vol. 6 No. 1, pp. 6-33. https://doi.org/10.1108/17539261311312960

Publisher

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Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited

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