Distance to Headquarter and Real Estate Equity Performance

Abstract

We study the effect of geographic portfolio diversification of real estate firms on their investment performance before and after the global financial crisis (GFC). In addition to previously used dispersion metrics, we also account for the distance of the properties to the corporate headquarters.We document a notable shift in the non-market performance of real estate companies after the crisis. Pre-GFC, we do not find a difference in non-market performance across equities based on geographic diversification. Post-GFC, equities with high geographic dispersion significantly outperform the market, while firms with concentrated property holdings do not deliver a significant alpha. Increased real estate equity market sophistication and strong institutional presence can explain why this effect is only observed for dispersed small firms, those invested outside gateway metro areas, or companies with low institutional ownership.

Information Frictions in Real Estate Markets: Recent Evidence and Issues

“…In papers on geographic asset allocation strategies, home market bias and diversification discount are mostly discussed separately as manifestations of distinct information issues, i.e., information asymmetry versus principal-agent conflicts. Notable exceptions focused on institutional investors that bridge the two branches include Ling et al ( 2021d ) and Milcheva et al ( 2021 ). Ling et al ( 2021d ) argue that geographic diversification impedes both access to information and monitoring.…”

“…Milcheva et al ( 2021 ) study the relation between geographic diversification and REIT performance before and after the Global Financial Crisis. They calculate the distance to headquarters and share of properties located in the headquarters MSA of the firm, like in the home bias literature, and a MSA-level Herfindahl Index, like in the diversification discount papers.…”

Local Beta: Has Local Real Estate Market Risk Been Priced in REIT Returns?

“…However, Feng et al (2019) find that operating efficiency and improved transparency can offset the diversification discount. Milcheva et al (2021) find a higher non-market return for REITs with more diversified assets after the global financial crisis.…”

“…Some literature focuses on the 'quality' of the location, including exposure to the so-called 'Gateway' markets (Ling et al, 2018a), the risk-adjusted property market portfolio returns (Ling et al, 2020a), and locational characteristics such as density and locational economic risks (Fisher et al, 2020). Other literature investigates the distance of properties from firm headquarters (Ling et al, 2018b;Milcheva et al, 2021). Spatial econometric modelling has also been used to quantify the impact of the locational factors (Zhu & Milcheva, 2020).…”

Portfolio Diversification across U.S. Gateway and Non-Gateway Real Estate Markets

“…Related to the notion of gateway markets, Fisher et al (2022) find that U.S. REITs with holdings in high-density locations, as measured using population density data, earn higher riskadjusted returns and carry higher real estate systematic risk than their peers in low-density locations. Finally, using a broad set of 25 "gateway" markets in the US, Milcheva et al (2021) show that REITs with a low exposure to those markets have a higher return to compensate for a higher risk. It is unclear of course whether the main conclusions using REIT data can be used at par concerning the underlying real estate assets.…”