Cognitive bias, intuitive attributes and investment decision quality in commercial real estate in Uganda
| DOI | https://doi.org/10.1108/JPIF-11-2020-0129 |
| Published date | 13 September 2021 |
| Date | 13 September 2021 |
| Pages | 197-219 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Moses Munyami Kinatta,Twaha Kigongo Kaawaase,John C. Munene,Isaac Nkote,Stephen Korutaro Nkundabanyanga |
Cognitive bias, intuitive attributes
and investment decision quality in
commercial real estate in Uganda
Moses Munyami Kinatta, Twaha Kigongo Kaawaase, John C. Munene,
Isaac Nkote and Stephen Korutaro Nkundabanyanga
Makerere University Business School, Kampala, Uganda
Abstract
Purpose –This study examines the relationship between investor cognitive bias, investor intuitive attributes
and investment decision quality in commercial real estate in Uganda.
Design/methodology/approach –A cross-sectional research survey was used in this study, and data were
collected from 200 investors of commercial real estate in Uganda using a structured questionnaire. Hierarchical
regression analysis was used to test the hypotheses derived under this study.
Findings –The results indicate tha t investor cognitive bia s and investor intuitive a ttributes are positive a nd
significant determin ants of investment decis ion quality in commerci al real estate. In addition , the two
components of Invest or cognitive bias (fram ing variation and cognit ive heuristics) are pos itive and
significant determin ants of investment decisio n quality, whereas mental a ccounting is a negative and
significant determi nant of investment decision qualit y. For investor intuitive attribut es, confidence degree
and loss aversion are po sitive and significant determi nants of investment decisio n quality, whereas herding
behavior is a negative and significant determi nant of investment decisi on quality in commercial re al estate in
Uganda.
Practical implications –For practitioners in commercial real estate sector should emphasize independent
evaluation of investment opportunities (framing variation), simplify information regarding investments
(Cognitive heuristics), believe in own abilities (Confidence degree), be risk averse (loss aversion) and avoid
making decisions based on subjective visual mind (mental accounting) and group think/herding in order to
make quality investment decisions. For policymakers, the study has illuminated factors such as provision of
reliable information that ought to be taken into account when promulgating policies for regulation of the
commercial real estate sector. This will help investors to come up with investment decisions which are
plausible.
Originality/value –Few studies have focused on investor cognitive bias and investor intuitive attributes on
investment decision quality in commercial real estate. This study is the first to examine the relationship,
especially in the commercial real estate sector in a developing country like Uganda.
Keywords Investor cognitive bias, Investor intuitive attributes, Investment decision quality,
Commercial real estates, Uganda
Paper type Research paper
1. Introduction
Commercial Real Estates (CRE) are properties developed and/or invested in specifically
and exclusively for generating rental income and/or appreciation in value to realize
capital gains upon disposal, rather than as a living space for the owner of the property.
When developed for rental purposes, the tenants may use CREs for residential
purposes (e.g. apartments), office/work space, shopping malls, industrial parks,
warehouses and hotels. Globally, investments in commercial real estate have shown
diverse trends. Bollinger and Pagliari (2019) argue that most commercial real estate
developers opt for diversified portfolios that bring appropriate yields over time. The
recent global outlook report indicates that the USA commercial real estate investment
market registered a downward trend as compared to the Asia Pacific and European real
estate investment markets, which earned 6% and 8% returns, respectively (Rossi and
Vismara, 2018).
Investment
decision
quality
197
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 13 November 2020
Revised 23 March 2021
20 June 2021
Accepted 20 June 2021
Journal of Property Investment &
Finance
Vol. 40 No. 2, 2022
pp. 197-219
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-11-2020-0129
Uganda’s commercial real estate sector earns annual rate of returns of 6.8% for retails,
10.6% for residential apartments and 11.9% for office and industrial estates (Cytonn, 2019).
However, despite the comparatively high and stable returns, the quality of investment
decisions in CREs in Uganda is questionable amidst widening unmet demand in one section
of the sector. National Housing policy (2016) revealed that Uganda still faces a housing
shortage of 600,000 units, especially in Kampala amidst the ever-growing population. It is not
clear why commercial real estate investors ignore investments in affordable and low-cost
houses, yet according to Hashemi and Cruickshank (2015), there is more demand for them,
and they are more profitable than commercial high-cost buildings, especially in developing
countries.
Studies, this far, have tried to explain Investment Decision Quality (IDQ) using standard
finance theories. For example, Brown and Matysiak (2000),Yu and Zhang (2008) and
Subramaniam and Velnampy (2017) suggest that IDQ is associated with relatively high
rates of return on invested capital, leading to capital accumulation, profits, value creation
and cost-efficient and enable investors to allocate their capital to the most strategically
viable projects. And IDQ is the cornerstone between good and bad investment outcomes,
with the less-than-optimal investment decision quality arising out of imperfect information
and high transaction costs that act as barriers to informed quality investment decisions
among investors in the industry (Muhammad and Jantan, 2009). Xiao and Tan (2007)
indicate that the commercial real estate marketplace displays inefficient qualities, including
high transaction costs and lag in the supply of properties due to increasing demand and
lack of organized market for short selling. Besides, commercial real estate investment
decision requires relatively large amounts of capital (Kinnard, 2003). Available studies
have ignored the behavioral theories that could provide the requisite explanations,
especially in emerging economies since behaviors of individuals do change with time and
circumstances.
The current study is motivated to fill the void and is anchored on two complimentary
theories, i.e. expected utility theory and prospect theory to show how behavioral factors –
investor cognitive bias and investor intuitive attributes, affect commercial real estate
investment decisions. The behavioral factors, which originate from psychology, may
appropriately explain investment decision quality in an inefficient market like commercial
real estate (Kahneman and Tversky, 1979;Shukla et al., 2020). Investor cognitive bias refers
to framing, cognitive heuristics and mental accounting, while investor intuitive attributes
are confidence degree, loss aversion and herding behavior (Carstens and Freybote, 2019;
Jasiniak, 2018). According to Wofford et al. (2010), mental shortcuts are biases used by
investors to cope with information processing in a situation of market inefficiency. Tan
et al. (2018) argue that real estate asset pricing is not simply about the investment
fundamentals. However, due to bounded rationality, we anchor to the past and others’
opinions, we herd, we react emotionally and we are overly averse to loss when assessing the
quality of investment decisions. We overweight timely information and discard evidence
that does not support our preconceptions. Thus, this study examines the relationship
between investor cognitive bias, intuitive investor attributes and investment decision
quality in commercial real estate in Uganda and finds thatb othare significant predictors of
investment decision quality.
1.1 Study setting
Uganda provides a good setting for a study on IDQ in commercial real estate. The sector is
liberalized with private investors competing with a quasi-government owned housing and
construction company –The National Housing and Construction Company Ltd (NHCC,
2021). There is an enabling law, the Condominium Property Act (2001) that enables the
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