Exploring sentiment-driven trading behaviour of different types of investors in the London office market

Abstract

The paper investigates the sentiment-driven trading behaviour of the four types of investors in the London office market, i.e. UK institutional investors, UK private investors, UK listed real estate companies/REITs and overseas investors. In addition, we examine the relationship between investor sentiment and property performance. Related indices are first calculated to examine whether sentiment change of one investor type leads to changes in the sentiments of other types of investors. We find that herding exists in the London office market. UK private investors follow a contrarian strategy to UK institutional investors and UK listed real estate companies/REITs and enter/exit the market at different points of time. UK institutional investors tend to follow the sentiment of UK listed real estate companies/REITs and overseas investors with lags. There is no evidence that overseas investors rely upon the sentiment of UK specialized property investors in their decision-making. We also find the sentiment-driven trading behaviour of different types of investors is influenced differently by market fundamentals. Property market returns such as yield and rental growth rate has significant impact on trading activity of overseas investors, but not on other investors. The stock market return and securitized real estate return has significant impact on the trading activity of UK institutional investor and overseas investor. Market fundamentals have no significant influence on the trading behaviour of UK private investor and listed real estate company/REIT.

The effect of sentiment on commercial real estate returns: investor and occupier perspectives

“…Shreds of empirical evidence show that the sentiment of different market participants can cause heterogeneous impacts on asset pricing dynamics (Buraschi and Jiltsov, 2006; Cahill et al , 2017). The empirical studies from Freybote and Seagraves (2017) and Ke and Sieracki (2019) further suggest that trading behaviours are significantly different for various types of investors. In the commercial real estate market, the difference between investors and occupiers contend that their sentiment can impact pricing differently.…”

“…Furthermore, Barkham and Ward (1999) observed discounts to net asset values (NAV) and concluded that investor sentiment is a sizeable element in discounts to NAV for REITs. More recently, Ke and Sieracki (2019) have attempted to proxy sentiment by transaction volume. These studies provide useful insights into the market-based proxy for the sentiment.…”

“…having the intention of space consumption) given the unique dual nature of the real estate. The inability to short sell further prevents arbitrage (Ling et al ., 2014) and leads to persistent mispricing of real estate assets (Ke and Sieracki, 2019). Given the peculiarities of real estate markets, these markets are likely prone to sentiment-induced mispricing.…”