Diversification Gains, Sector Exposure and Systematic Risk in International Public Real Estate Markets
||Diversification Gains, Sector Exposure and Systematic Risk in International Public Real Estate Markets
||22nd Annual European Real Estate Society Conference in Istanbul, Turkey
||Investors increasingly use listed real estate securities to provide international diversification in their property portfolios. The success of such strategies depends on differing exposure to risk factors across the range of securities acquired and on the long run integration (or lack of it) of the returns of real estate firms. However, real estate investors (particularly those focussed on active management strategies) often select individual stocks (for example by size) that may not track published national indices (the basis of much research) and may have sector and geographical biases (for example, with excess exposure to major cities). As a result, commonly-held stocks may have a high exposure to global risk factors, altering risk-adjusted return and diversification relationships. In this paper, we re-analyse the benefits of holding a portfolio of international real estate securities, by incorporating evidence of real estate factors, cointegrating relationships and structural breaks and, specifically, test whether the diversification benefits depend on how integrated or independent the firms and countries are at global or regional level and whether more risk reduction can be achieved through holding internationally diversified investments in markets that are less dominated by global real estate factors. We examine the portfolio performance and factor sensitivities of “cointegrated and “independent” groups first at national level and then at individual sector level and for firms with high exposure to global financial centres. We assess whether the portfolios differ in terms of risk-adjusted return based on Sharpe ratios and sensitivity to systematic risk, using a range of multi-factor models, and decompose portfolio risk using Fama-Macbeth approach testing for differences in risk sensitivity and volatility. The extent of this global effect helps inform international investors, particularly in light of a growing integration within global securities markets. This task is given further significance by the events of the global financial crisis, where correlation between markets (and asset classes) appeared to increase rapidly precisely when diversification would have been most valuable.
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||Public Real Estate Investments; An International Perspective
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