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Portfolio Diversification across U.S. Gateway and Non-Gateway Real Estate Markets

Author

Listed:
  • Martin Hoesli

    (University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School)

  • Louis Johner

    (University of Geneva - Geneva School of Economics and Management)

Abstract

Using simulation analysis and property-level data for the U.S., we compare performance metrics for portfolios containing varying proportions of gateway and non-gateway markets. Risk-adjusted performance is found to be similar across types of markets. Gateway markets have higher appreciation and total returns, while non-gateway markets exhibit higher income returns even after accounting for capital expenditures. Downside risk appears to be slightly greater for gateway markets than for non-gateway markets; however, full drawdown and recovery lengths tend to be shorter for gateway markets. Systematic risk is found to be constant across types of markets. We show that discriminating between gateway and non-gateway markets is useful for mixed-asset diversification purposes, with the former type of markets appearing in risky portfolios and the latter in low-risk portfolios. By considering a large spectrum of performance metrics in a realistic investment setting, the results should provide investors with valuable information when allocating funds across gateway and non-gateway markets. The paper also provides insights regarding how best to define gateway markets.

Suggested Citation

  • Martin Hoesli & Louis Johner, 2021. "Portfolio Diversification across U.S. Gateway and Non-Gateway Real Estate Markets," Swiss Finance Institute Research Paper Series 21-89, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2189
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    More about this item

    Keywords

    Commercial Real Estate; Gateway Markets; Non-Gateway Markets; Diversification; Risk-Adjusted Performance; Downside Risk;
    All these keywords.

    JEL classification:

    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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