An investigation into the investment decision-making practices of South African institutional investors

Abstract

Purpose The South African listed property market has changed its legal basis from property loan stock companies and property unit trusts to adopt the more familiar international structure, real estate investment trusts. The main distinction is how shareholding is structured and investment returns are paid out to shareholders, which results in a different tax treatment. It is hoped that this change would attract more foreign investment, but it is questionable if this is sufficient to convince global investors who, amidst a seeming worsening of the stability in the political and economic environment, would probably need more insight into aspects such as investment decision making within these South African organisations. The paper aims to discuss these issues. Design/methodology/approach Using a balanced scorecard (BSC) framework, this study investigates the relevance of investment decision-making frameworks in South Africa. A survey using a sample of institutional investors that are included in the South African Property Market Index was conducted. Findings The study found similarities in decision-making priorities of South African institutional investors to those of previous studies. With the focus on retail property, tenant mix and secondary to that, quality of the centre management team is found to be important for forecasting expected returns in a retail investment decision environment. Diversification strategies were found to have similar results to previous studies, leaning more towards geographic location than economic location. Further, the study suggested the use of a BSC framework, linking the financial information and different financial ratios to nonfinancial aspects that need specific consideration in a retail investment environment. Research limitations/implications Retail property is considered to be of particular concern due to the business enterprise value that could be created if superior management techniques are applied. The investment decision stage concerned with forecasting expected returns relies on financial and quantitative models such as those derived from Modern Portfolio Theory. In a shopping mall environment, however, future performance is driven by nonfinancial factors, for example, tenant mix and superior customer experience. Therefore, forecasting expected returns in a retail environment requires a nuanced approach relative to other commercial property sectors. Originality/value The paper is considered to be original in its analysis of the retail real estate market in South Africa. This offers new insight into retail properties specifically, but also how investors in South Africa react to decision-making practices. This adds value in the internationalisation of the property market and the consistency and transparent practices applied globally.

Property investment decision-making behaviour amidst market disruptions: an institutional perspective

“…Decision-making in property investment has been extensively reviewed within property literature as a multicomplex process with notable financial burden (French, 2001; MacCowan and Orr, 2008; Nsibande and Boshoff, 2017), which requires a thorough consideration of economic principles such as the forces of demand, supply, risk and return (Isaac and O'Leary, 2011; Hoesli and MacGregor, 2014), non-economic factors that has to do with regulatory and political influence (Sayce et al , 2007; Filippova et al , 2018) as well as the social environment that deals with inter-organizational interactions and public acceptance of the investment goal (Gallimore et al , 2000). Yet, there is no universally accepted conceptualization of the task (Sah, 2011).…”

“…According to Gigerenzer and Selten (2001), in complex situations involving a series of multiple consequences, decision-makers either focus on the consequences of their actions or base their judgment solely on the expected outcome . Hence, the significance of cognition and emotion in the decision-making process has continued to emerge (Diaz, 1999; Gallimore and Gray, 2002; Sah, 2011; Nsibande; Boshoff, 2017).…”

“…Decision-making theories in the context of property investments have, therefore, been described as frameworks that scholars explore to delineate the processes involved in the evaluation of alternative investment options (Roberts and Henneberry, 2007). As established in the extant literature, scholars have described the behaviour of property investors through various theories that have been propounded and are being criticized (French, 2001; Parker, 2014; Nsibande and Boshoff, 2017). While there are arguments that some theories have limited relevance based on their scope (Gigerenzer and Selten, 2001; Sah, 2011), the mode of gathering information useful for decision-making is restricted in other theories (Roberts and Henneberry, 2007).…”

“…Traditionally, property investment decision-making has been viewed as a rational and logical process (Hargitay and Yu, 1993; Diaz, 1999; Gigerenzer and Selten, 2001), with the decision-maker operating procedurally in an ideal market environment where optimal decisions can be made (Roberts and Henneberry, 2007). However, recent studies have argued that investment information is not static (Gallimore and Gray, 2002; Nsibande and Boshoff, 2017 ) ; thus, it is unrealistic to assume perfect market conditions. Acknowledging the role of heuristics and bias in decision-making, behavioural models have also been developed (Gallimore et al , 2000; Sah, 2011) based on the information processing paradigm, pioneered by Newell and Simon (1972).…”

“…Although rational, procedural techniques are useful in property appraisals (Diaz, 1999), they should not solely inform behavioural judgments about risk and opportunities that abound in the market environment (Nsibande and Boshoff, 2017). As the conventional focus of the literature on property investment decision remains largely premised on the financial risk of property investments (French, 2001; MacCowan and Orr, 2008; Isaac and O'Leary, 2011; Hoesli and MacGregor, 2014), evidence regarding the influence of market disruptions on the decision-making behavior of property investors remains unclear.…”