Effect of behavioral biases on the relationship between real estate investment strategies and operational efficiency of real estate firms in Nairobi county, Kenya

Abstract

Despite several interventions that help cushion developers in Kenya, the supply of housing units stands at approximately 50,000 a year against an annual demand of 250,000. Over the past five years’ operational efficiency has been on the downward trend with rental yield dropping from 7.6% in 2017; fell to 7.4% in 2018, to 7% in 2019 than 4.0% in 2020 and 6.1% in 2021 so was occupancy rate reducing to approximately from 86% in 2017 to 74% in 2021.Personality traits of investors have been blamed for these trends since managers are biased in their investment decision making thus creating investment portfolios that are familiar to them. This study sought to analyze this trend with an analysis of three variables; behavioral biases, real estate investment strategies and operational efficiency. Theoretical literature illustrates primary relationships between these variables and indicates that there is indeed a relationship between real estate investment strategies and operational efficiency, however, the moderating aspect of behavioral bias on the relationship between the two variables has not been previously studied. Behavioral bias was examined to identify its effect on the relationship between real estate investment strategies and operational efficiency of real estate firms in Nairobi County. The specific goals were to establish the effect of behavioral biases on operational efficiency, to determine the effect of real estate investment strategies on operational efficiency and to assess the moderation effect of behavioral biases on the relationship between real estate investment strategies and operational efficiency of real estate investment firms in Nairobi County. The study employed a correlational survey design and census sampling technique was used to draw a sample of 234 active and registered firms in Nairobi County. Primary data was collected using questionnaires and reliability tested using Cronbach Alpha’s method with a 0.7 cut off. Face validity was done by pre-testing 10% of the population which did not form part of the sample whereas convergence and divergence validity were measured using correlations. Data was analyzed using statistical techniques such as hierarchical regression, frequencies, means, and standard deviations. Pearson’s product moment correlation coefficients tested for linearity and independence of variables tested using the Durbin-Watson statistics. The study found out that behavioral biases and real estate investment strategies had a positive and significant effect on operational efficiency with an explanatory power of R²=27.1% and R²=60.3% respectively. Behavioral biases and real estate investment strategies as predictor variables had a significant R² of 36.2%; (p<0.01). The R² of incorporating the interaction term between behavioral biases and real estate investment strategies was R²=42.4% (p<0.01; change of R²=6.2% (p<0.01) implying that behavioral biases moderates the relationship between real estate investment strategies and operational efficiency. However, the moderation effect of behavioral biases reduced the strength of the relationship between real estate investment strategies and operational efficiency from 60.3% to 27.1%. In conclusion, behavioral biases diminish the relationship between real estate investment strategies and operational efficiency. The study recommends firms to focus on making informed and accurate investment decisions so as to create investment portfolios that will enhance their operational efficiency and focus on eliminating the negative effects of behavioral biases affecting their decision-making. This study has brought new knowledge that indeed behavioral biases moderate the relationship between real estate investment strategies and operational efficiency but reduces the strength of this relationship and it will be of importance to investors and government in rational investment decision making and policy formulation.