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Real Estate Diversification Benefits

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Abstract

Diversification benefits are shown to vary inversely with the correlation between asset returns. The present study estimates average correlation coefficients between real-estate returns from property-specific data of an internationally diversified real estate and in the Netherlands. It is found that diversification benefits within the United States are much larger than on the European Continent. The low correlation found between U.S. real estate returns implies that portfolios of small numbers of U.S. properties would require large return premia. Also, the study helps to explain shy financial intermediaries exist in the real estate industry and when investors should consider employing them.

Suggested Citation

  • Dirk P.M. De Wit, 1997. "Real Estate Diversification Benefits," Journal of Real Estate Research, American Real Estate Society, vol. 14(2), pages 117-136.
  • Handle: RePEc:jre:issued:v:14:n:2:1997:p:117-136
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    References listed on IDEAS

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    1. Yoon Dokko & Robert H. Edelstein & Marshall Pomer & E. Scott Urdang, 1991. "Determinants of the Rate of Return for Nonresidential Real Estate: Inflation Expectations and Market Adjustment Lags," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(1), pages 52-69.
    2. Mao, James C T, 1970. "Essentials of Portfolio Diversification Strategy," Journal of Finance, American Finance Association, vol. 25(5), pages 1109-1121, December.
    3. Daniel C. Quan & John M. Quigley, 1989. "Inferring an Investment Return Series for Real Estate from Observations on Sales," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 218-230.
    4. Elton, Edwin J & Gruber, Martin J, 1977. "Risk Reduction and Portfolio Size: An Analytical Solution," The Journal of Business, University of Chicago Press, vol. 50(4), pages 415-437, October.
    5. Statman, Meir, 1987. "How Many Stocks Make a Diversified Portfolio?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 353-363, September.
    6. Whitmore, G. A., 1970. "Diversification and the Reduction of Dispersion: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 5(02), pages 263-264, June.
    7. Dirk P.M. De Wit, 1993. "Smoothing Bias in In-House Appraisal-Based Returns of Open-End Real Estate Funds," Journal of Real Estate Research, American Real Estate Society, vol. 8(2), pages 157-170.
    8. Latane, Henry A & Young, William E, 1969. "Test of Portfolio Building Rules," Journal of Finance, American Finance Association, vol. 24(4), pages 595-612, September.
    9. 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.
    10. James R. Follairi, 1989. "Inferring an Investment Return Series for Real Estate from Observations on Sales," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 231-234.
    11. R. Brian Webb & Mike Miles & David Guilkey, 1992. "Transactions-Driven Commercial Real Estate Returns: The Panacea to Asset Allocation Models?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(2), pages 325-357.
    12. Samuelson, Paul A., 1967. "General Proof that Diversification Pays," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(01), pages 1-13, March.
    13. 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.
    14. 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.
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    Cited by:

    1. Helen Higgs & Andrew C. Worthington, 2002. "The Prospects for Geographic Diversification in UK Regional Property Investment: Implications Derived from Multivariate Cointegration Analysis," School of Economics and Finance Discussion Papers and Working Papers Series 111, School of Economics and Finance, Queensland University of Technology.
    2. Natalya Delcoure & Ross Dickens, 2004. "REIT and REOC Systematic Risk Sensitivity," Journal of Real Estate Research, American Real Estate Society, vol. 26(3), pages 237-254.
    3. Kim Hiang Liow & Graeme Newell, 2012. "Investment Dynamics of the Greater China Securitized Real Estate Markets," Journal of Real Estate Research, American Real Estate Society, vol. 34(3), pages 399-428.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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