Academic journal article Journal of Real Estate Literature

Government Influences, Emotions, and the Investment Decisions of South African Property Fund Managers

Academic journal article Journal of Real Estate Literature

Government Influences, Emotions, and the Investment Decisions of South African Property Fund Managers

Article excerpt

The private sector and free market play an important role in the allocation of scarce resources, and in the process of efficient investment decision-making. Government interference and influence, for whatever reason, may distort market efficiency and can possibly influence investment decision-making. This also applies to property and property fund markets.

In the last two centuries, South African property ownership and development has gone through four distinct phases: colonialism, isolation, internal unrest, and democracy and change of power (Ramabudo, Kotzé, and Verster, 2007). The degree of government participation in (and influence on) property and property funds depends on the political dispensation of a given country. The current government in South Africa has moved away from centralized powers to a greater degree of federalism, and extensive powers have been transferred to the second (provincial) and third (municipal) levels of government.

One example of how the South African government is actively supporting (and influencing) property development and investment in the country's cities is the project of creating Urban Development Zones with tax incentives. Private sector involvement in property investment is therefore expected to grow as the government allows the private sector to become more active in property investment. There are a number of good opportunities in a number of large cities, for example, regional shopping centers continue to be excellent investments, with capitalization rates currently around 10%.

Lyons, Smuts, and Stephens (2002), Peng and Thibodeau (2012), and Spaans, Trip, and Van der Wouden (2013) investigated housing prices in various countries, new housing supply, and the influence of land use regulations on land availability. However, relatively little research has thus far been conducted on the impact that a government's actions might have on the decisions of property fund managers. In their study, Ramabudo, Kotzé, and Verster (2007) therefore call for research on the influence of the South African sociopolitical environment on property investments in the country.

Currently South African political attitudes about private enterprise, investment, and growth are positive, so negative government interference seems unlikely. However, recent political developments, such as the rising of a stronger political opposition and calls for changes to the Restitution of Land Rights Amendment Act by some political parties (Ndlozi, 2014; Magubane, 2015; Wicks, 2015) has revealed the influence that government decisions may have on the property sector, and thus on behavior of property fund managers. These events have led to the focus of the present study. The question arises: Does government intervention and influence on the property market have an impact on the decisions made by property fund managers? If so, what is the extent of the influence that government has on the decisions made by property fund managers?

Scholars have isolated four forces that may have an impact on property value (and hence the decisions of property fund managers): social, economic, the physical environment, and governmental forces. The identification of these forces is complicated by the fact that they sometimes overlap. It cannot be denied that the influence of governmental forces on real estate values can be significant. Governmental forces on real estate may include taxes (city or national, depreciation schedules, and allowances), monetary policy, and property taxes (city-specific differences can affect demand and supply of commercial and industrial investment) (Carr, Lawson, and Schultz, 2003). Labor issues can also influence an investor's decision regarding investment location (Carr, Lawson, and Schultz, 2003). The quality of services available in an area, such as police services, fire protection, and health care, can also be relevant to investors (Carr, Lawson, and Schultz, 2003).

Singh (2009) explains that the field of behavioral finance includes the study of the process and influence of human aspects in decision-making and how the processes and these aspects influence markets. …

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