A behavioural study of the decision processes underpinning disposals by property fund managers
| Date | 11 July 2008 |
| Pages | 342-361 |
| DOI | https://doi.org/10.1108/14635780810886645 |
| Published date | 11 July 2008 |
| Author | Richard J. MacCowan,Allison M. Orr |
| Subject Matter | Property management & built environment |
A behavioural study of the
decision processes underpinning
disposals by property fund
managers
Richard J. MacCowan
Carter Towler, Leeds, UK, and
Allison M. Orr
Department of Urban Studies, University of Glasgow, Glasgow, UK
Abstract
Purpose – The main aim of this paper is to investigate the specific factors that influence fund
managers’ decisions to dispose of property.
Design/methodology/approach – This study explores the reasons behind the decision-making
processes associated with the disposal of real estate within a portfolio, and the information sources
utilised by fund managers. A behavioural finance approach is adopted with the field research carried
out as a survey-based analysis of the disposal decisions made by fund managers in the UK property
fund market.
Findings – The main reason for disposal of an investment is due, in part, to re-structuring the
portfolio. This is also linked to under-performance of the asset involved, and current market
expectations. The implications for the study are that it identifies that there are links between rational
and irrational behaviour in the selection of assets, not only for disposal, but also in terms of investment
as a whole. This can be based on the inefficiency of the property market, and the lack of accurately
available information.
Originality/value – The study is unique as it provides a comprehensive commentary on the
disposal behaviour of fund managers at the individual property and portfolio-wide levels.
Keywords Investments,Behavioural economics, Fund management
Paper type Research paper
1. Introduction
Neo-classical economics rests on three basic assumptions (Mullainathan and Thaler,
2000; Weintraub, 1992). People are assumed to act independently based on full and
relevant information, have rational preferences among outcomes that can be identified
and associated with a value, and firms are assumed to optimise decisions by profit
maximising while individuals seek to maximise their utility. Fund management in
practice appears to counteract these assumptions. Studies on the stock market
demonstrate that judgements can be sub-optimal, and classed as irrational behaviour, a
view supported by the findings of Grinblatt and Keloharju (2000). Information in
investment markets is not always perfect, and there is evidence to suggest that fund
managers are subject to heuristics and biases, and their investment patterns tend to
follow trends.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
JPIF
26,4
342
Received January 2008
Accepted March 2008
Journal of Property Investment &
Finance
Vol. 26 No. 4, 2008
pp. 342-361
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780810886645
This study introduces the behavioural aspect of financial economics to the
investment decision-making processes associated with the disposal of property within
a portfolio. Whilst there is a rapidly growing body of academic research into the factors
that influence the acquisition of direct property investments, there is substantially less
on the factors driving investment decisions to dispose of direct real estate holdings, or
the attitudes and characteristics of fund managers involved with making these
decisions. Studies to date have tended to be at a single-asset level, and research in the
field of portfolio-wide decision making is in its infancy. Studies by both Gardner and
Matysiak (2005) and Fisher and Young (2000) acknowledge this lacuna and both
recommend further research into the factors that trigger the disposal of real estate
assets.
Phyrr and Cooper (1982) reveal that investors dispose of real estate for the following
four main reasons:
(1) investment goals and objectives have been achieved;
(2) failure to achieve these goals;
(3) profitability; and
(4) for personal reasons.
In reality, the motivation behind asset sales, and the criteria that fund managers use to
decide a property is ripe for disposal are varied, and decisions tend to embrac e the
impact the disposal will have on the portfolio as a whole. Successful property fund
management appears to require a more sophisticated and impersonal evaluation of
assets, including market forecasting, portfolio risk analysis, and actuarial
mathematics.
The main aim of this research is to investigate the specific factors that influence
fund managers’ decisions to dispose of property. Market evidence alone cannot be the
main criteria for disposal; neither can reliance on forecasting to provide completely
accurate guidance. By delving into the area of behavioural finance, this study will
attempt to provide a commentary on the behaviour of fund managers, in terms of
disposals at the individual property and portfolio-wide levels. More specifically, the
study seeks to answer the following questions:
.What is the typical holding period of direct property and how does this relate to
fund managers’ investment strategies?
.What are the most important variables that influence disposal decisions made by
fund managers?
.Do portfolio managers, especially fund managers, utilise information from a
wide selection of sources in their decision-making process when disposing of
investment property within a portfolio, and do their decisions appear rational?
In undertaking this research, the study aims to bridge a substantial gap tha t exists in
this field of property research. By surveying fund managers, the study intends to
identify the underlying trends in both mixed-asset and property-only funds. In doing
so, the study will expand the work of Crosby and McAllister (2004), which suggests
reasons why individual property assets are selected for sale. This will also contribu te
to the body of research completed in the area of holding periods (Gardner and
Matysiak, 2005; Fisher and Young, 2000; Crosby and McAllister, 2004), giving an
Processes
underpinning
disposals
343
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