Herding in the UK Real Estate Market Stephen L. Lee Cass Business School, City University London, 106 Bunhill Row, London

Introduction: Herding is said to be present in a market when investors decide to imitate the trading practices of those they consider to be better informed, rather than acting upon their own beliefs and private information. In other words, herding exists when investors are “doing what everyone else is doing, even when their information suggests doing something different” Importance 1.Trading in the same direction by a group of investors can lead to mispricing; 2.Correlated trades diminish investors’ ability to reduce their risk exposure via diversification; 3.The existence of herd behaviour provides information to policymakers about whether or not they should be concerned about the potential destabilizing effects of herd behaviour

Introduction: Previous studies of herding are largely concentrated in the stock market and have shown contradictory results depending, to a large extent, on the estimation model and whether or not adjustments are made to account for any autocorrelations in the returns series, due to thin trading. In addition, as far as the author is aware no study has examined herding in the private real estate market, with only two studies testing for herding in securitized real estate returns (Zhou and Anderson, 2013 and Philippas et al. 2013). This study therefore contributes to the literature on herding by studying the propensity for investors in the UK private real estate market to exhibit herding behaviour using monthly data over the period , using a number of model specifications. The analysis is then repeated in three property-types (Retail, Office and Industrials) to see if herding is concentrated in a particular sector.

Methodology: Measures of Cross-sectional dispersion : Cross-sectional Standard Deviation: Danger of outliers Cross-sectional Absolute Deviation: More Robust and used here

Methodology: Regression models : Dummy variable: Nonlinear Asymmetric

Data: All data employed in this study is collected from the Investment Property Databank Monthly Index (IPDMI) series and covers the period from 1987:1 to 2014:12, the data broken down into 32 so-called market segments. Table 1: Summary Statistics: Monthly Data 1987:1 to 2014:12

Figure 1: CSAD and Market Returns: Monthly data 1987:1 to 2014:12

Regression Results: Table 2: Market-wide Herding Model Results, with and without AR terms: Monthly Data 1987:1 to 2014:12 NB: All the coefficients are significant of the 5% level except *

Regression Results Table 3: Sector Herding Model Results, with and without AR terms: Monthly Data 1987:1 to 2014:12 NB: All the coefficients are significant of the 5% level except *

Conclusions : 1.Different models different results; 2.Adjustments for thin trading matters; 3.Herding is mainly in down-markets; and 4.Herding is concentrated in Retails and Offices.

Caveats: 1.32 market segments? 2.Volume? 3.OLS? 4.Dynamic models

Herding in the UK Real Estate Market Any Questions?