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Assessing Risk for International Real Estate Investments

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    Abstract

    Overseas real estate investment has increased considerably in recent years. The assessment of risk for these investments, especially for real estate, has thus become very important. This study assesses the performance of real estate, stocks and bonds in the U.S., Canada, the United Kingdom, Australia, and New Zealand over the period 1985-93. The results indicate that the degree of appraisal-smoothing and intertemporal correlation in each of the five international real estate series is significant, resulting in the need to increase the real estate risk estimates by 34% to 47%. To account for currency risk over this nine-year period, currency-adjusted returns and risk were also estimated for investors from each of these five countries. All risk profiles increased significantly for international investors when adjusting for currency risk. However, additional portfolio diversification was achieved using real estate for international investors.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol11n02/v11p103.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 11 (1996)
    Issue (Month): 2 ()
    Pages: 103-116

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    Handle: RePEc:jre:issued:v:11:n:2:1996:p:103-116

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    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Web page: http://www.aresnet.org/

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    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    1. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-78, July.
    2. David Geltner, 1989. "Estimating Real Estate's Systematic Risk from Aggregate Level Appraisal-Based Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 463-481.
    3. Paul K. Asabere & Robert Kleiman & Carl McGowan, 1991. "The Risk-Return Attributes of International Real Estate Equities," Journal of Real Estate Research, American Real Estate Society, vol. 6(2), pages 143-152.
    4. Ross, Stephen A & Zisler, Randall C, 1991. "Risk and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 175-90, June.
    5. Solnik, Bruno H., 1974. "An equilibrium model of the international capital market," Journal of Economic Theory, Elsevier, vol. 8(4), pages 500-524, August.
    6. David J. Hartzell & James R. Webb, 1988. "Real Estate Risk and Return Expectations: Recent Survey Results," Journal of Real Estate Research, American Real Estate Society, vol. 3(3), pages 31-37.
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    Cited by:
    1. Foort Hamelink & Martin Hoesli, 2004. "What Factors Determine International Real Estate Security Returns?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(3), pages 437-462, 09.
    2. Glassman, Debra A. & Riddick, Leigh A., 2001. "What causes home asset bias and how should it be measured?," Journal of Empirical Finance, Elsevier, vol. 8(1), pages 35-54, March.
    3. Martin Hoesli & Jon Lekander & Witold Witkiewicz, 2004. "New International Evidence on Real Estate as a Portfolio Diversifier," Journal of Real Estate Research, American Real Estate Society, vol. 26(2), pages 161-206.
    4. James Payne & Anandi Sahu, 2004. "Random walks, cointegration, and the transmission of shocks across global real estate and equity markets," Journal of Economics and Finance, Springer, vol. 28(2), pages 198-210, June.
    5. Addae-Dapaah, Kwame & Tan Yong Hwee, Wilfred, 2009. "The unsung impact of currency risk on the performance of international real property investment," Review of Financial Economics, Elsevier, vol. 18(1), pages 56-65, January.
    6. Ivo Wit, 2010. "International Diversification Strategies for Direct Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 433-457, November.
    7. John Gallo & Ying Zhang, 2010. "Global Property Market Diversification," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 458-485, November.
    8. Robert T. Kleiman & James E. Payne & Anandi P. Sahu, 2002. "Random Walks and Market Efficiency: Evidence from International Real Estate Markets," Journal of Real Estate Research, American Real Estate Society, vol. 24(3), pages 279-298.
    9. Joseph L. Pagliari, Jr. & James R. Webb & Todd A. Canter & Frederich Lieblich, 1997. "A Fundamental Comparison of International Real Estate Returns," Journal of Real Estate Research, American Real Estate Society, vol. 13(3), pages 317-348.

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