Behavioural Biases Of Real Estate Investors And Investment Performance In Kenya

Abstract

Kenya is the world’s top performer in terms of real estate transparency and there has been a phenomenal growth in real estate investment in Kenya in the last ten years (2005-2016), with returns that way outdo the returns in the security markets. Despite this, in Kenyan market, which yields a 6% returns in East Africa remains the fastest growing compared to other emerging markets in Uganda and Tanzania. This study explored the behavioural biases of real estate investors in the Kenyan Market and assess the moderating role of financial literacy. The specific objectives of this study were; to explore the influence of heuristic based behavioural biases on the real estate performance in Kenya, to find the effect of prospect based behaviour biases on the performance of real estate investments in Kenya, to find the effect of investment behaviour based on herding on the performance of real estate investments in Kenya, to find the effect of market factors based behaviour biases on the performance of real estate investment in Kenya and finally, to assess the significance of financial literacy as a moderating factor between the real estate investors behavioural biases and investment performance in Kenya. Hypothesis for each regressor variable were developed and empirically tested. The study was guided by heuristics theory, prospect theory, herding theory and investment market theory. The study adopted a positivism research philosophy and a descriptive research design. The area of study was Nairobi, Kenya as it has the highest number dwellers as well as the highest demand for real estate in Kenya. A list of 284 registered real estate agents was obtained from the Estate Agents Registration Board (EARB). A multistage sampling approach was used to obtain a sample of 426 real estate investors in Nairobi region. Information was sought from the estate investors in Nairobi Kenya. Data was collected using a questionnaire and the Likert summated scale as the measurement scale from the investors. A pilot was conducted and test of reliability using Cronbach alpa coefficient was done. Descriptive analysis was made, generate and interpret the frequency Table. Measure of central tendency and dispersions were conducted using Mean (x) and Standard deviation (S.D) respectively. Principal component analysis, varimax rotation and orthogonal were used to test the construct validity. Test of factorability was conducted using Kaiser Meyer Olkin test. Tests of Sphericity was done using Bartlett’s tests using Chi Coefficients and associated p-values. This data was transformed to continuous data and the returns tested for Gaussian assumptions using numerical Kolmogorov- Smirnov and Shapiro-Wilk (W) statistics. In the case of predictors, test of independence using Durbin Watson (d) statistic, test of multicollinearity using Variance Inflation Factor and Tolerance, test of heteroscedasticity using p-p plots was done before subjecting the data to bivariate linear and finally multiple linear regression. To test study hypothesis, Model R2, ANOVA Statistics and Regression coefficients were generated and interpreted. Results were presented using interactive Tables, and figures. The results indicate that heuristic bias, prospect bias, herding bias and market based bias influence the performance of real estate industry. The results also indicate that financial literacy moderates the influence of the behavioural biases on the performance of real estate industry in Kenya. Based on these findings, the study recommends that when evaluating investments, investors should avoid at barely looking at the risk and return characteristics of that individual investment. Further, the study recommends that the Estate Agents Registration Board (EARB) which is the regulatory body for estate agency practice in Kenya and other individual and institutional market players use these findings as a basis of investor education and minimization of noise trading in the Kenyan real estate markets.