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Refining Economic Diversification Strategies for Real Estate Portfolios

Diversification of real estate portfolios has historically been accomplished by utilizing a geographic and/or property-type strategy. More recently, a number of economically based diversification categories have been proposed by industry researchers (see Hartzell, Shulman and Wurtzebach, 1987 and Wurtzebach, 1988). This study tests the efficiency of the existing geographic and geographic/economic strategies currently in the literature against an economically based diversification strategy using straightforward government SIC code categories. The three strategies used include: the NCREIF four geographic regions; the Solomon Brothers eight regions (a combination of economics and geography); and a purely economic grouping of the 316 MSAs in the United States using the nine major government SIC code categories. This study finds that the addition of economic underpinnings to a geographically constrained model, as developed by Hartzell et al. (1987) creates a higher risk/return efficient frontier than the purely geographic NCREIF diversification model. However, shedding geography altogether and diversifying along purely economic lines provides an even better efficient frontier during real estate cycle recovery and growth periods. This new strategy provides the real estate portfolio manager with the opportunity to increase risk-adjusted returns with a strategy that is easily understood and applied.

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File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol08n01/v08p055.pdf
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Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 8 (1993)
Issue (Month): 1 ()
Pages: 55-68

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Handle: RePEc:jre:issued:v:8:n:1:1993:p:55-68
Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
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Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
Web: http://pages.jh.edu/jrer/about/get.htm Email:


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  1. 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.
  2. 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.
  3. Emil E. Malizia & Robert A. Simons, 1991. "Comparing Regional Classifications for Real Estate Portfolio Diversification," Journal of Real Estate Research, American Real Estate Society, vol. 6(1), pages 53-78.
  4. 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.
  5. Sharpe, William F., 1967. "Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(02), pages 76-84, June.
  6. Charles H. Wurtzebach & Glenn R. Mueller & Donna Machi, 1991. "The Impact of Inflation and Vacancy on Real Estate Returns," Journal of Real Estate Research, American Real Estate Society, vol. 6(2), pages 153-168.
  7. Mike Miles & Tom Mc Cue, 1982. "Historic Returns and Institutional Real Estate Portfolios," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 10(2), pages 184-199.
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