The impact of international diversification on U.S. Equity REIT performance

The function of a REIT manager is to effectively and profitably manage a real estate portfolio. Among the ways to achieve this goal is to improve performance by managing market exposure through geographic diversification. Previous research recognizes the role of portfolio geographic diversification on efficiency and firm value. For example, Campbell, Petrova and Sirmans (2003) explain REIT property acquisitions produce wealth benefits when companies reconfirm their geographical focus suggesting firms benefit from more geographically concentrated portfolios. Similarly, Hartzell, Sun and Titman (2014) find that as REITs increase the geographical dispersion of their properties, firm value significantly decreases, also suggesting a REIT geographical diversification discount. More recently, Feng, Pattanapanchai, Price and Sirmans (2021) find a relationship between the level of firm transparency and the benefit of geographical diversification; that is, less transparent firms benefit from geographical concentration while more transparent firms benefit from diversification. Relatedly, Zhu and Lizieri (2022) suggest REITs with more geographically concentrated portfolios observe higher risk when the portfolio is exposed to more volatile property markets but if portfolios are geographically diversified, the effect of local market risk decreases. In sum, the evidence of whether geographical diversification improves or decreases REIT efficiency and value remains inconclusive. In this paper, we explore the impact of geographical diversification from an international perspective. We find that although most U.S. equity REITs tend to concentrate assets in the continental United States, a non-trivial portion of the U.S. REIT market tends to diversify internationally. Therefore, we raise the question of whether the strategy of international geographical diversification is value-enhancing.