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Diversification Potential in Real Estate Portfolios

Author

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  • Candelon, Bertrand

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • Fuerst, Franz
  • Hasse, Jean-Baptiste

Abstract

Real estate, despite its spatial fixity, is subject to considerable cross-border investment flows. However, it may be surmised that the diversification potential of international real esta te investments dwindles if markets become increasingly interlinked. Building on a unique dataset of direct real estate markets covering 16 OECD countries over the period 1999-2018, we compare country-level and sector-level diversification potential. We apply a relative Sharpe ratio loss approach and develop a modified version of this measure, relying on the modified Value-at-Risk, which is robust to non-normality. Using a studentized circular blockbootstrap procedure, robust confidence intervals for both measures are built. This new diversification test provides investors and analysts with a valuable tool as it delivers both estimates and robust significance levels. The empirical findings broadly reveal that international diversification strategies outperform sectoral diversification of real estate assets.

Suggested Citation

  • Candelon, Bertrand & Fuerst, Franz & Hasse, Jean-Baptiste, 2021. "Diversification Potential in Real Estate Portfolios," LIDAM Discussion Papers LFIN 2021001, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlf:2021001
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    Cited by:

    1. Tchai Tavor, 2024. "The Influence of Airbnb Announcements on North American Capital Markets: Insights for Stakeholders," IJFS, MDPI, vol. 12(1), pages 1-20, January.
    2. Jean-Baptiste Hasse & Christelle Lecourt & Souhila Siagh, 2023. "Institutional Stock-Bond Portfolios Rebalancing and Financial Stability," AMSE Working Papers 2322, Aix-Marseille School of Economics, France.
    3. Schmidt, Kirsten & Tonzer, Lena, 2024. "Banks' foreign homes," Discussion Papers 46/2024, Deutsche Bundesbank.
    4. Conlon, Thomas & Cotter, John & Ropotos, Ioannis, 2024. "Diversification with globally integrated US stocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 90(C).

    More about this item

    Keywords

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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