Performance Dynamics And Diversification Benefits Of European Property Securities

This research assesses the role of European property securities traded in Austria, Belgium, Finland, France, Germany, Italy, Spain, Sweden, Switzerland, United Kingdom and United States in domestic mixed-asset and international investment portfolios over a 10-year period, 1999-2009. This is an extension of the study conducted by Newell (2003) for the European property companies over 1993-2002. While Newell (2003) uses EPRA property stock series and MSCI common stock series, this study extracts both common stock and property securities data from a single source, i.e. S&P BMI (for common stock) and S&P Property (for property securities). By comparing the risk-adjusted performances and correlation profiles of different asset types (i.e. common stocks, property securities, bonds and cash), the objective is to assess whether European property securities enhance portfolio performance. In addition, local and U.S dollars are used to examine whether currency has negated the diversification benefits over the study period. This research spans over a 10-year period beginning from May 1999 to April 2009. In order to assess the stability of correlations during varying market conditions, two sub-periods from 1999 to 2004 and 2004 to 2009 are also adopted in the research. The findings show that most of the European and U.S real estate securities have outperformed the other asset classes over the entire study period. However, it is noted that the risk-adjusted performance of the property securities is not ideal when compared to cash and bonds. Most of the European real estate securities tend to have more superior risk-adjusted performance than common equities in the long-run. Unlike the correlations of property securities with cash and bonds, the correlations of the real estate securities and common stocks have grown stronger in the second sub-period as compared to the first sub-period. This is likely due to the higher inter-regional correlation caused by the sub-prime crisis. As such, diversification benefits of property securities in the domestic mixed-asset portfolios have been greatly reduced. The results have also shown that despite the increasing global financial market integration, the European real estate securities can still offer international diversification benefits, even though the diversification benefits of property stocks during the period of high market volatility are not pronounced.