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

Martin Hoesli and Louis Johner
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Louis Johner: University of Geneva - Geneva School of Economics and Management

No 21-89, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Commercial Real Estate; Gateway Markets; Non-Gateway Markets; Diversification; Risk-Adjusted Performance; Downside Risk (search for similar items in EconPapers)
JEL-codes: C63 G11 G23 R33 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2021-12
New Economics Papers: this item is included in nep-rmg and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2189

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