ARE THE BENEFITS FROM GEOGRAPHICAL DIVERSIFICATION DECLINING WITHIN EUROPE?

Daniel Piazolo

ERES from European Real Estate Society (ERES)

Abstract: The increase in cross border investments tends to synchronise the national markets. Based on the extensive database of DID and IPD it can be derived that the property markets within Europe reveal signs of convergence. This convergence is especially pronounced in the office market, where the rental growth cycles show significant correlations. Geographical diversification can only work if the property markets have not yet completely converged. Diversification allows a reduction in the variance of the total return without a reduction in the magnitude of the total return or, alternatively, an increase in the total return without an increase in the variance. The DID / IPD data suggest, that these benefits of geographical diversification are less likely with engagements in the office markets. However, these benefits are still offered through the retail and residential markets. There are some national exceptions to the overall convergence of the property markets within Europe, notably the one of Germany. The German property market has been characterized through low rental development for a decade. The other European property markets had significant rental increases for offices at the end of the 1990ís and a slow-down since then. The apparent consonance of the German and the other European office market at a low rental growth level in 2004 can not be taken as the beginning of a joint co-movement. Correlation is not static. After turning points in the market cycles, some markets pick up more quickly than others. Consequently, the observed convergence within Europe does not necessary exclude renewed divergence when the markets recover. Due to the extensive and unique database of DID Deutsche Immobilien Datenbank and IPD Investment Property Databank deep insights into the development of the European real estate markets are possible. The novel question of declining diversification benefits due to the increase in correlations offers a new focus for this research field. Analytical Methodology: To examine convergence / divergence extensive use is made of correlation analyses and other statistical tools. Proposed Application: The focus is the European real estate market.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2006-01-01
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