PURPOSE OF THIS PAPER: Globally real estate shares offered in initial public offerings (IPOs) have on average been shown to appreciate in value on the first day of trading. This mispricing phenomenon, known as underpricing, is typically attributed to the influence of market players. This paper aims to test this finding in a South African context as well as investigate the effects of offer price, capital raising, underwriting, offer period, listing method and market sentiment as key variables in determining the level of underpricing.

DESIGN/METHODOLOGY/APPROACH: The literature review includes a critical assessment of the initial performance of listed real estate funds globally and identifies a number of variables that have an effect on their performance. Thirtyfive SA companies, listed on the JSE over the past 12 years, are chosen through a process of elimination and tested for the presence of underpricing. With the use of correlation and regression analysis, factors identified in the literature are tested for their effect on underpricing. In addition, three interviews are conducted with industry professionals in order to better understand the factors that result in underpricing of real estate IPOs in South Africa.

FINDINGS: Based on the analysis of data, this research confirms that although underpricing is present in listed real estate in South Africa, the initial return of these funds cannot be explained by any of the variables identified in the literature. The mechanism by which these funds list is largely a negotiated process of private placement with large institutional investors. These institutions, with long term holding strategies, determine prices prior to the IPO and generally do not reduce holdings in the short term, thereby resulting in low initial share liquidity.

VALUE: This research has important implications for South African and international investors, who wish to gain an understanding of the initial performance of listed real estate in South Africa.