The Diversification Capacity of Property Investments: Nothing is Sure

The common investment theory distinguishes market risks which can not be influenced and the object specific risks that can be influenced. It is acknowledged, that by increasing the number of investment objects, diversification, the risk level of the investment portfolio can be substantially decreased. Generally, diversification is also considered a valid strategy for property investments to decrease the risk level of the portfolio, but the adjustment speed and the effectiveness of diversification, expressed in a decreasing risk level, are considered less then for other investments types. In previous publications (ERES 2006), the author has expressed his doubts concerning risk reduction through diversification in case of property investment portfolios. The main points of critics were about not accounting for the managerial risk, the assumed constant market risk and the assumed object specific risk reducing effect of increasing the number of investments objects. This paper focuses on these points of critic and analyses the diversification effect for property investments. The analysis is performed on the Dutch office asset market. The results demonstrate that the acquisition policy influences the diversification effect; in some cases the common investment theory is confirmed and in other cases the risk level increases with the number of added properties.