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Risk reduction and real estate portfolio size

Author

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  • Peter J. Byrne

    (Department of Land Management and Development, The University of Reading, UK)

  • Stephen Lee

    (Department of Land Management and Development, The University of Reading, UK)

Abstract

There is remarkably little empirical evidence of the advantages of increased size on risk levels in real estate portfolios based on actual portfolios. This paper improves this by examining the portfolio risk of a large sample of actual real estate data in the UK over the period from 1981 to 1996. The results show that real estate portfolios of larger sizes tend, on average, to have lower risks than smaller sized portfolios and, more importantly, that portfolios with only a few assets can have very high or very low risk. For fund managers to be confident that their portfolio will have a risk level like the average, they need to hold portfolios of a considerably greater size than they might expect, or can sensibly acquire. Previous studies suggesting that only 20-40 properties are needed to reduce the risk of a property portfolio down to the market level are a significant underestimate. The actual figure is likely to be 400-500 properties, well above that of even the largest fund in the UK. Size alone does not necessarily lead to a reduction in portfolio risk. Other factors are of greater importance. Copyright © 2001 John Wiley & Sons, Ltd.

Suggested Citation

  • Peter J. Byrne & Stephen Lee, 2001. "Risk reduction and real estate portfolio size," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 22(7), pages 369-379.
    • Handle: RePEc:wly:mgtdec:v:22:y:2001:i:7:p:369-379
    DOI: 10.1002/mde.1026
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    References listed on IDEAS

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    3. William P. Lloyd & John H. Hand & Naval K. Modani, 1981. "The Effect Of Portfolio Construction Rules On The Relationship Between Portfolio Size And Effective Diversification," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 4(3), pages 183-193, September.
    4. Edward J. Schuck & Gerald R. Brown, 1997. "Value weighting and real estate portfolio risk," Journal of Property Research, Taylor & Francis Journals, vol. 14(3), pages 169-187, January.
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    Cited by:

    1. Steven Devaney & Colin Lizieri, 2005. "Individual Assets, Market Structure and the Drivers of Returns," ERES eres2005_156, European Real Estate Society (ERES).
    2. Charles-Olivier Amédée-Manesme & Fabrice Barthélémy, 2018. "Ex-ante real estate Value at Risk calculation method," Annals of Operations Research, Springer, vol. 262(2), pages 257-285, March.
    3. Steven Devaney & Colin Lizieri, 2005. "Individual Assets, Market Structure and the Drivers of Return1," Journal of Property Research, Taylor & Francis Journals, vol. 22(4), pages 287-307, December.
    4. Kola Ijasan & George Tweneboah & Maurice Omane-Adjepong & Peterson Owusu Junior, 2019. "On the global integration of REITs market returns: A multiresolution analysis," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1690211-169, January.
    5. Stephen Lee & Giacomo Morri, 2015. "Real estate fund active management," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 33(6), pages 494-516, September.
    6. Charles-Olivier Amédée-Manesme & Michel Baroni & Fabrice Barthélémy & Mahdi Mokrane, 2015. "The impact of lease structures on the optimal holding period for a commercial real estate portfolio," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 33(2), pages 121-139, March.
    7. Brett Robinson, 2012. "How many leases are enough to diversify a portfolio of multi-let industrial properties?," ERES eres2012_351, European Real Estate Society (ERES).
    8. Charles-Olivier Amédée-Manesme & Michel Baroni & Fabrice Barthélémy & Mahdi Mokrane, 2015. "The impact of lease structures on the optimal holding period for a commercial real estate portfolio," Journal of Property Investment & Finance, Emerald Group Publishing, vol. 33(2), pages 121-139, March.
    9. Andrew Baum & Nick Colley, 2017. "Can Real Estate Investors Avoid Specific Risk?," Abacus, Accounting Foundation, University of Sydney, vol. 53(3), pages 395-430, September.
    10. Lee, Chyi Lin & Stevenson, Simon & Cho, Hyunbum, 2022. "Listed real estate futures trading, market efficiency, and direct real estate linkages: International evidence," Journal of International Money and Finance, Elsevier, vol. 127(C).

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