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Risk reduction in the United Kingdom property market

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  • Peter Byrne
  • Stephen Lee

Abstract

This paper investigates the potential benefits and limitations of equal and value-weighted diversification using as an example the UK institutional property market. To achieve this it uses the largest sample (392) of actual property returns that is currently available, over the period 1981 to 1996. To evaluate these issues two approaches are adopted; first, an analysis of the correlations within the sectors and regions and, second, simulations of property portfolios of increasing size constructed both naively and with value-weighting. Using these methods it is shown that the extent of possible risk reduction is limited because of the high positive correlations between assets in any portfolio, even when naively diversified. The results have implications for the development and maintenance of a property portfolio because they indicate that the achievable level of risk reduction depends upon the availability of assets, the weighting system used and the investor's risk tolerance.

Suggested Citation

  • Peter Byrne & Stephen Lee, 2000. "Risk reduction in the United Kingdom property market," Journal of Property Research, Taylor & Francis Journals, vol. 17(1), pages 23-46, January.
    • Handle: RePEc:taf:jpropr:v:17:y:2000:i:1:p:23-46
    DOI: 10.1080/095999100368001
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    References listed on IDEAS

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    Cited by:

    1. Brett Robinson, 2012. "How many leases are enough to diversify a portfolio of multi-let industrial properties?," ERES eres2012_351, European Real Estate Society (ERES).
    2. Ayub, Usman & Shah, Syed Zulfiqar Ali & Abbas, Qaisar, 2015. "Robust analysis for downside risk in portfolio management for a volatile stock market," Economic Modelling, Elsevier, vol. 44(C), pages 86-96.
    3. Alexeev, Vitali & Tapon, Francis, 2013. "Equity Portfolio Diversification: How Many Stocks are Enough? Evidence from Five Developed Markets," Working Papers 2013-16, University of Tasmania, Tasmanian School of Business and Economics, revised 20 Nov 2013.
    4. James Chong & Alexandra Krystalogianni & Simon Stevenson, "undated". "Dynamic Correlations across REIT Sub-Sectors," Real Estate & Planning Working Papers rep-wp2011-07, Henley Business School, University of Reading.
    5. Vitali Alexeev & Francis Tapon, 2014. "The number of stocks in your portfolio should be larger than you think: diversification evidence from five developed markets," Published Paper Series 2014-4, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    6. Stephen Lee & Giacomo Morri, 2015. "Real estate fund active management," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 33(6), pages 494-516, September.
    7. James Chong & Alexandra Krystalogianni & Simon Stevenson, 2012. "Dynamic correlations between REIT sub-sectors and the implications for diversification," Applied Financial Economics, Taylor & Francis Journals, vol. 22(13), pages 1089-1109, July.
    8. Nafeesa Yunus, 2013. "Dynamic interactions among property types," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 31(2), pages 135-159, March.

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