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Value Contribution of Diversification: An Empirical Investigation of the Individual Value of Real Estate in Portfolios

Chiara Künzle, Sven Bienert, Cay Oertel and Werner Gleißner

ERES from European Real Estate Society (ERES)

Abstract: This paper aims to show that the value of a real estate portfolio can be increased through systematic diversification. This value contribution can, on the one hand, be proven within a portfolio and, on the other hand, by including the owner's remaining assets. A quantification would be a comprehensible proof that a portfolio can generate an investor-specific value contribution through diversification beyond the sum of the individual market values. The basic research approach is proven using an alternative valuation method. In particular a DCF valuation is used, which is extended by a Monte Carlo Simulation. This method addresses all risks that can arise from real estate investments. This approach can help portfolio managers with transaction decisions. Moreover, it is an instrument that demonstrates the competence of the initiator and helps to achieve better financing conditions by showing professional investors the efficiency of the planned fund or portfolio. The paper presents an alternative approach to the prevailing Modern Portfolio Theory, which focuses only on the expected return on the one hand and the corresponding risk on the other. With the method applied in this paper, the value contribution of such a diversification strategy is demonstrated for the first time using market data.

Keywords: Direct Property Investment; Discounted Cash Flow; Diversification; Risk Management (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2021-01-01
New Economics Papers: this item is included in nep-cwa, nep-isf, nep-rmg and nep-ure
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Handle: RePEc:arz:wpaper:eres2021_82