Real estate portfolio diversification by property type and region

Abstract

Analyses data from the USA and UK to determine whether diversification within a region by property type is better than diversification between regions within a property type. Compares both strategies to full diversification by both property type and region. Calculates and compares property type and regional correlation matrices. Produces efficient frontiers and calculates principal components to determine if there are dominant property type or regional dimensions to real estate returns. Suggests that for the USA a purely retail portfolio diversified over all regions would have been almost as effective as a fully diversified portfolio. In the UK, there is less diversity across regions within retail property. Overall, there is no simple conclusion applicable to all regions and all property types in either country.

The Significance of Property Sector and Geographic Diversification in Australian Institutional Property Portfolios

“…A range of techniques have been used to assess these diversification benefits, including correlations, efficient frontiers and cluster analysis. Whilst differences in diversification benefits exist across different property markets (Eichholtz et al, 1995), the consensus view has been that property sector diversification is more effective than geographic diversification (Fisher and Liang, 2000;Lee, 2001) and hence, property sector diversification should form the first strategic level of property portfolio construction (Lee, 2001).…”

Time weighted portfolio optimisation

“…In addition Walsh and Tsou (1998) show that while the non-trading effect evident in thinly traded equities has the effect of reducing forecast ability this is more than compensated by the diversification effect from the use of indices. Finally Eichholtz et al (1995) argue that such a three-property type and three 'super regional' classification provides a viable portfolio investment strategy for investors in the UK, with little to be gained from a more refined classification scheme. In other words the use of a small number of real estate indices with un-smoothed returns in the portfolio optimisation process may be acceptable.…”

Do house prices influence stock prices? Empirical investigation from the panel of selected European Union countries

“…One group of the researchers has focused on portfolio analysis of real estate (e.g., Case, Goetzmann, & Rouwenhorst, 2000;Eichholtz, Hoesli, MacGregor, & Nanthakumaran, 1995), while another has focused on both real estate and financial assets (e.g., Graeme & James, 1996;Hoesli, Lekander, & Witkiewicz, 2004). Globalisation has impelled different manifestations of financial liberalisation, which has shaped the local and international real estate markets.…”