A Behavioral Interpretation of the NAV Discount Puzzle in Listed Real Estate Companies (Version Aug 2017)

Abstract

The NAV discount is a long standing puzzle in the listed real estate context. In this paper we extend the existing literature’s rational and noise trader explanations by exploring the influence of specific irrational behaviors. Based on behavioral biases identified in the stock and real estate markets, we hypothesize the existence of a relationship between lagged NAV growth and the NAV discount. The findings provide initial evidence of trend-chasing behavior between the dual real estate markets. The results have broader implications for the perception of the relationship between public and private real estate markets.

Keywords: Judgemental Bias, Behavioural Economics, Noise Trader, Overreaction

JEL Classification: G11, G15