A Re-Examination of Real Estate Investment Decisionmaking Practices

Abstract

Executive Summary. This study attempts to ascertain the extent to which institutional real estate investors use sophisticated decisionmaking practices. It expands on earlier studies by surveying a wider cross-section of investors and by considering a more comprehensive decisionmaking process. Overall, it appears that the responding institutional real estate investors employ fairly sophisticated investment decisionmaking practices.Strategic analysis is a regular practice for most respondents. Eighty-three percent of the respondents quantify their return objective, but only 64% quantify their risk objective. Most forecast before-tax, cash returns over a ten-year investment horizon. Almost all (94%) require estimates of annual, operating returns, but far fewer require estimates of resale return (60%), tax savings (10%), or refinancing returns (24%). Almost all the respondents require a hazardous waste report, but less that half require a formal feasibility analysis or an independent appraisal. Formal quantitative risk analysis is required by only one-third of the respondents with sensitivity analysis, scenario analysis, and high-average-low forecasting being the preferred tools. Only 35% make formal risk adjustments. The most popular evaluation measures are the discounted cash flow measures, which are required by 68% of the respondents. Approximately three-quarters of the respondents require a formal implementation plan, but post-auditing is required by only 61% of the respondents.