Market timing of new property launches : the role of investor sentiment

Abstract

Determining the right time to launch a new residential project is critical to the success of the developer as it will determine if the company will attain the level of expected profits which the development was planned for. However, this is an area which lacks research. Thus, this study seeks to contribute to the understanding of the factors which affects launch timings for properties. Specifically, investor sentiment hypothesis, which originated from the finance realm will be discussed and evaluated in this study. This study aims to leverage on the research methodology and findings in the finance realm and determine its applicability in the direct real estate context. This is due to similarities of both fields of study such as the determination of a successful launch and a time window where the company can choose the exact time to launch their product.The hypothesis could possibly be used to explain the clustering effect of properties launches as developers will try to launch their properties during the period of time where there are overly optimistic buyers who are willing to pay more to secure a unit in their development. In a speculative market,investors will act irrationally in the expectation for positive returns in the near future. These high investor sentiments will then give rise to higher property prices in the subsequent time periods as compared to the previous time period. A modified approach based on the IPO test methodology was used to test for the validity of the hypothesis in a direct real estate launch clustering phenomenon. This is due to some differences in the execution of sales and the time needed to complete the transactions in the two products (i.e. stocks and property). The key findings of this research showed that launch clustering phenomenon is present in direct real estate. Furthermore, the timing of launches can be attributed to economy specific variables such as the Private Property Price Index (PPPI) which reflects the general sentiments relating to direct real estate and property specific variables such as tenure and planning region.Empirical results derived from ‘hot’ and ‘cold’ periods also showed strong evidence affirming the investor sentiment hypothesis in the direct real estate context. Due to the inefficiencies of the property market, a pilot study was conducted to test a theory relating to information asymmetry between developers and property investors. However, results from the pilot study showed a weak link in relation to market timing and thus further reaffirms that the findings for investor sentiment hypothesis in relation to the phenomenon of launch clustering of properties is relevant and robust.