Diversification Potential in Real Estate Portfolios

Bertrand Candelon, Franz Fuerst and Jean-Baptiste Hasse

No 2021001, LIDAM Discussion Papers LFIN from Université catholique de Louvain, Louvain Finance (LFIN)

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.

Keywords: Portfolio diversification; Real estate markets (search for similar items in EconPapers)
Pages: 27
Date: 2021-02-12
New Economics Papers: this item is included in nep-cwa and nep-rmg
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Citations: View citations in EconPapers (3)

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Journal Article: Diversification potential in real estate portfolios (2021)
Journal Article: Diversification potential in real estate portfolios (2021)
Working Paper: Diversification potential in real estate portfolios (2021)
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