An Investigation of Herding Behaviour in Offshore and Domestic REITs in South Africa

This study investigates behavioural contagion in the South African Real Estate Investment Trust (REIT) market by examining herding dynamics between internationally diversified (offshored) and domestically focused (localised) REITs. Despite the increasing internationalisation of South African REITs, limited evidence exists on whether investors in local REITs imitate the trading behaviour of offshore-focused REITs, particularly during periods of market stress and directional market movements. Addressing this gap, the study assesses herding behaviour across REIT segments under normal, extreme, and asymmetric market conditions and evaluates its implications for market efficiency and portfolio diversification. The analysis employs the Cross-Sectional Standard Deviation (CSSD) and Cross-Sectional Absolute Deviation (CSAD) approaches, enhanced with extreme market quantile thresholds (5th and 95th percentiles) and directional market return specifications to capture nonlinear and time-varying herding effects. Equally weighted portfolios comprising 11 offshored REITs and 9 localised REITs were constructed using daily market data covering the period from 3 October 2017 to 27 March 2024. The findings reveal no statistically significant evidence of herding behaviour within or between REIT segments across daily, weekly, and monthly frequencies. This absence of herding persists during extreme market conditions and across both bullish and bearish market regimes. However, offshored REITs exhibit greater market influence, consistently demonstrating stronger leadership during both upward and downward market movements. These results suggest that investment decisions in the South African REIT market are primarily driven by firm-specific information and rational assessment rather than behavioural imitation or collective sentiment. The study contributes to the behavioural finance and real estate investment literature by providing evidence of market resilience and informational efficiency in an emerging REIT market. The findings further highlight the diversification benefits of REIT segmentation and the growing significance of internationally diversified REITs in shaping market performance.