A Re-Examination of Real Estate Investment Decisionmaking Practices

Edward Farragher and Robert Kleiman

Journal of Real Estate Portfolio Management, 1996, vol. 2, issue 1, 31-39

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.

Date: 1996
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DOI: 10.1080/10835547.1996.12089521

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