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Refining Economic Diversification Strategies for Real Estate Portfolios

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    Abstract

    Diversification of real estate portfolios has historically been accomplished by utilizing a geographic and/or property-type strategy. More recently, a number of economically based diversification categories have been proposed by industry researchers (see Hartzell, Shulman and Wurtzebach, 1987 and Wurtzebach, 1988). This study tests the efficiency of the existing geographic and geographic/economic strategies currently in the literature against an economically based diversification strategy using straightforward government SIC code categories. The three strategies used include: the NCREIF four geographic regions; the Solomon Brothers eight regions (a combination of economics and geography); and a purely economic grouping of the 316 MSAs in the United States using the nine major government SIC code categories. This study finds that the addition of economic underpinnings to a geographically constrained model, as developed by Hartzell et al. (1987) creates a higher risk/return efficient frontier than the purely geographic NCREIF diversification model. However, shedding geography altogether and diversifying along purely economic lines provides an even better efficient frontier during real estate cycle recovery and growth periods. This new strategy provides the real estate portfolio manager with the opportunity to increase risk-adjusted returns with a strategy that is easily understood and applied.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol08n01/v08p055.pdf
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    Bibliographic Info

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

    Volume (Year): 8 (1993)
    Issue (Month): 1 ()
    Pages: 55-68

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    Handle: RePEc:jre:issued:v:8:n:1:1993:p:55-68

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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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    References

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    1. Emil E. Malizia & Robert A. Simons, 1991. "Comparing Regional Classifications for Real Estate Portfolio Diversification," Journal of Real Estate Research, American Real Estate Society, vol. 6(1), pages 53-78.
    2. Charles H. Wurtzebach & Glenn R. Mueller & Donna Machi, 1991. "The Impact of Inflation and Vacancy on Real Estate Returns," Journal of Real Estate Research, American Real Estate Society, vol. 6(2), pages 153-168.
    3. Sharpe, William F., 1967. "Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(02), pages 76-84, June.
    4. David Hartzell & John Hekman & Mike Miles, 1986. "Diversification Categories in Investment Real Estate," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(2), pages 230-254.
    5. Mike Miles & Tom Mc Cue, 1982. "Historic Returns and Institutional Real Estate Portfolios," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 10(2), pages 184-199.
    6. Glenn R. Mueller & Barry A. Ziering, 1992. "Real Estate Portfolio Diversification Using Economic Diversification," Journal of Real Estate Research, American Real Estate Society, vol. 7(4), pages 375-386.
    7. David J. Hartzell & David G. Shulma & Vice President, 1987. "Refining the Analysis of Regional Diversification for Income-Producing Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 2(2), pages 85-95.
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    Cited by:
    1. Stanley D. Smith & Larry R. Woodward & Craig T. Schulman, 2000. "The Effect of the Tax Reform Act of 1986 and Overbuilt Markets on Commercial Office Property Values," Journal of Real Estate Research, American Real Estate Society, vol. 19(3), pages 301-320.
    2. Stanley D. Smith & Larry R. Woodward, 1996. "The Effect of the Tax Reform Act of 1986 and Regional Economies on Apartment Values," Journal of Real Estate Research, American Real Estate Society, vol. 11(3), pages 259-276.
    3. Leon Shilton & Graig Stanley, 1995. "Spatial Filtering: Concentration or Dispersion of NCREIF Institutional Investment," Journal of Real Estate Research, American Real Estate Society, vol. 10(5), pages 569-582.
    4. Darren Hayunga & R. Pace, 2010. "Spatial Statistics Applied to Commercial Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 41(2), pages 103-125, August.
    5. Kang, Wensheng, 2011. "Housing price dynamics and convergence in high-tech metropolitan economies," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 283-291, June.
    6. Piet M.A. Eichholtz, 1996. "The Stability of the Covariances of International Property Share Returns," Journal of Real Estate Research, American Real Estate Society, vol. 11(2), pages 149-158.
    7. Philip McCann & Stephen Lee, 2005. "The Implications for Regional Investment of Diversification Strategies in Commercial Real Estate Portfolios," ERSA conference papers ersa05p473, European Regional Science Association.
    8. Armonat, Stefan & Pfnür, Andreas, 2002. "Basel II and the German credit crunch?," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35585, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    9. Peter Byrne & Stephen Lee, 2006. "Geographical Concentration in the Institutional Market for Office Property in England and Wales," Real Estate & Planning Working Papers rep-wp2006-07, Henley Business School, Reading University.

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