Landmark buildings and diversification opportunities in the residential market

Landmark buildings are outstanding constructions recognizable on the basis of their unique design, high visibility and/or extraordinary relevance for the country (Appleyard, 1969). Empirical analyses demonstrate that residential buildings designated as landmarks sell for a substantial premium over comparable properties (Noonan, 2007) and also a rent premium could be paid for ìgoodîù architecture (Hough and Kratz, 1983). Literature points out the advantages related to diversification opportunities in a real estate portfolio applying the standard Market Portfolio Theory (hereinafter MPT) to this market (Pagliari, Webb and Del Casino, 1995). The main issue is the identification of the type of asset class in the real estate industry because diversification benefits of real estate investment can be accurately estimated only once the investment categories of real estate are sufficiently homogeneous (Hartzell, Heckman and Miles, 1986). In the residential market submarket specification has typically been performed on an ad hoc basis and researchers stratify a sample based on prior expectations related to municipal boundaries, school districts, racial divisions, or housing types (Goodman and Thibodeau, 1998). Studies on the trend of the price and rental yields for different types of residential buildings distinguish normally for the building size and the geographical area (Brown, Li and Lusht, 2000) and sometimes they discriminate between standard and luxury houses (Hui, Ng, Lau, 2011). No studies use also historical or artistic features as discrimination criteria in order to identify the residential asset class. The paper contributes to existing literature about the intra-sector diversification opportunities in the residential real estate units focusing the attention on the distinctive features of the landmark buildings. Using appraisal data we point out some difference in the rent and appreciation yield of landmark buildings respect to other type of residential buildings and we demonstrate that, under the assumptions of the standard MPT, landmark buildings can play an important role in diversified portfolio with high risk / return profile. Nowadays, Real Estate Institutional Investors considers mainly the bigger landmark buildings in the office and commercial sector (i.a. Block, 2011) but results obtained demonstrate that also smaller investments in the residential sector could be reasonable on the basis of a portfolio optimization process.