Home • PRRES Inc. Journal • Read the Journal

Diversification of Real Estate Investment in the Asia-Pacific Region

Author/s: Kwame Addae-Dapaah, Chong Chew Yong

Date Published: 1/01/2000

Published in: Volume 6 - 2000 Issue 2 (pages 31 - 45)

Abstract

Studies that hitherto have been done on real estate diversification strategies have given inconclusive results. Therefore this paper is aimed at evaluating the relative merits of three direct real estate investment diversification strategies (i.e. international diversification by sector, diversification across-types-within-nation, and international diversification across types) in the Asia Pacific region. The paper is based on return data for nine countries from 1984 to the fourth quarter of 1996 taken from JLW (now JLL) Asia Pacific Property Digest. Because of the peculiar nature of real estate investment, which precludes short selling and riskless borrowing, Matlab Optimization toolbox (a computer software) is used to construct the optimal portfolio composition from which the efficient frontiers are plotted. Furthermore all returns are denominated in the Singapore dollar to reflect the viewpoint of Singapore investors although analyses based on the currency of any of the sampled countries should produce similar results. Analyses of the return data reveal that international diversification by the retail sector was the best diversification strategy during the period although the choice between the retail and office sectors is a function of the investor's risk aversion vis-a-vis expected quarterly return.

Download Full Article

Download the Full Article PDF

14445921.2000.11104088.pdf 14445921.2000.11104088.pdf (1MB)

Keywords

Diversification - Expected Return - Investment - Real Estate - Risk - Strategy

References

  • Addae-Dapaah, ? and B.K. Choo. “International Diversification of Property Stock – A Singaporean Investor’s Viewpoint”. Real Estate Finance, 13(3), Fall, 1996, pp 54–64.
  • Addae-Dapaah, ? and L.Y.Goh. “Currency Risk and Office Investment in Asia Pacific”. Real Estate Finance.
  • Bahl, R.W. “Industrial Diversification in Urban Areas: Alternative Areas of Intermetropolitan Comparisons”. Economic Geography, July 1971, pp 414–425.
  • Balogh, C. and J.Sultan. “Investing in Foreign Real Estate: A Primer”. Real Estate Review, Spring, 1997, pp 73–80.
  • Baum, A. Critical Examination of the Measurement of Property Investment Risk. Discussion Paper No. 22, Department of Land Economy, University of Cambridge, 1989.
  • Biger, N. “Exchange Risk Implications of International Portfolio Diversification”. Journal of International Business Studies, 10(2), Fall, 1975, pp 64–74.
  • Brown, G. Property Investments and the Capital Markets, London: E & FN Spon, 1991.
  • Chan, L. and J. Lakonishok. “Are Reports of Beta’s Death Premature?” Journal of Portfolio Management, Summer, 1993, pp 51–62.
  • Clemente, F. and R. Sturgis. “Population Size and Industrial Diversification” Urban Studies, August, 1971, pp 65–68.
  • Dawson, A. and W.H. Rodney. “The Use of Exchange-rate Hedging Techniques by UK Property Companies”. Journal of Property Finance 5(4), 1994, pp 56–57.
  • D’Arcy, E. and S. Lee. “A Real Estate Portfolio Strategy for Europe: A Review of the Options”. Journal of Real Estate Portfolio Management 4(2), 1998, pp 113–123.
  • Eichholtz. P., M. Hoesli, B.D. MacGregor and N.Nanthakumaran. Real Estate Portfolio Diversification: By Sector or Region? Paper presented at the International Congress on Real Estate, Singapore, 24–26 April 1995.
  • Fama, E.F. and K.R. French. “The Cross-Section of Expected Stock Returns”. Journal of Finance, 47, June, 1992, pp 427 – 465.
  • Fogler, R.H. “20% in Real Estate: Can Theory Justify It?” Journal of Portfolio Management, Winter, 1984, pp 6 – 13.
  • Friedman, H.C. “Real Estate Investment and Portfolio Theory”. Journal of Financial and Quantitative Analysis, April 1970, pp 333 – 354.
  • “Real Estate Investment and Portfolio Theory” Journal of Financial and Quantitative Analysis, 6(2), March, 1971, pp 861 – 874.
  • Gau G.W. “Public Information and Abnormal Returns in Real Estate” Journal of American Real Estate and Urban Economics Association, 13(1), Spring 1985, pp 15 – 31.
  • “Efficient Real Estate Markets: Paradox or Paradigm?” Journal of American Real Estate and Urban Economics Association, 15(2), Summer, 1987, pp 1 – 12.
  • Gitman, L.J. Principles of Managerial Finance, Seventh Edition, New York: Harper Collins 1994.
  • Hartzell, D., J. Hekman and M.Miles. “Diversification Categories in Investment Real Estate”. Journal of American Real Estate and Urban Economics Association, 14(2), Summer 1986, pp 230 – 257.
  • Hartzell, D., D.Shulman and C.Wurtzebach. “Refining the Analysis of Regional Diversification for Income Producing Real Estate”. Journal of Real Estate Research, 2(2), Winter, 1987, pp 85–95.
  • Haugen, R.A. The New Finance: The Case Against Efficient Markets, New Jersey: Prentice Hall, 1995.
  • Heston, S.L. and K.G. Rouwenhorst. Does Industrial Structure Explain the Benefits of International Diversification? Working Paper, Yale University, 1993.
  • Irwin, S.H. and D.Landa. “Real Estate, Futures and Gold as Portfolio Assets “Journal of Property Management, Fall, 1987, pp 29–34.
  • Jennrich, R.I. “An Asymptotic Chi-square Test for the Equality of Two Correlation Matrices”. Journal of the American Statistical Association, 65, 1970, pp 904–912.
  • Jorion, P. “The Exchange-Rate Exposure of US. Multinationals” Journal of Business, 63, 1990, pp. 331–345.
  • Lintner, J. “Securities Prices and Risk and Maximal Gains from Diversification”. Journal of Finance, 20, 1965, pp 587–615.
  • Locke, S.M. “Performance Assessment Indexes and Capital Asset Pricing Models”. Journal of Valuation, 5,1987, pp230–248.
  • Liu, H., Grissom, TV. and D. Hartzell. “The Impact of Market Imperfections on Real Estate Returns and Optimal Investor Portfolios”. Journal of American Real Estate and Urban Economics Association, 18(4), pp 453–471.
  • Malizia, E. and R. Simmons. “Comparing Regional Classifications for Real Estate Portfolio Diversification”. Journal of Real Estate Research, 6(1), Spring 1991, pp 53–77.
  • Markowitz, H.M. “Portfolio Selection”. Journal of Finance, 7(1), 1952, pp 77–91
  • , New York: Wiley and Sons, 1959.Portfolio Selection: Efficient Diversification of Investments
  • Mathworks Inc. Matlab Optimization Toolbox. Massachusetts: Latik, 1998.
  • Miles, M. and T. McCue. “Historic Returns and Institutional Real Estate Portfolios”. Journal of American Real Estate and UrbanEconomicsAssociation, 10(2), 1982, pp 184 – 199.
  • Mossin, J “Equilibrium in a Capital Asset Market”. Econokmetrica, 34, 1966, pp 768 – 783.
  • Mueller, G. “Refining Economic Diversification Strategies for Real Estate Portfolios”. Journal of Real Estate Research, 8(1) Spring 1993, ppd 55–68.
  • Newell, G. and E.Worzola. “The Role of International Property in Investment Portfolios” Journal of Property Finance, 6(1), 1995, pp 55 – 63.
  • Radcliffe, R.C. Investments: Concepts, Analysis, Strategy. New York: Harper Collins, 4th Edition, 1994.
  • Roll, R. “Industrial Structure and The Comparative Behavior of International Stock Market Indices”. Journal of Finance, 47(1), 1992, pp 3–41.
  • Rubens, H.J., Bond, T.M. and R.J. Webb. “The Inflation Hedging Effectiveness of Real Estate”. Journal of Real Estate Research, 4(2), Summer, 1989, pp 45–54.
  • Seek, N.H. “Institutional Participation in the Asia Pacific Real Estate Markets: Are the Benefits North the Risks?” Real Estate Finance, 13(4), Winter, 1996, pp 51–57.
  • Sharpe, W.F. “A Simplified Model for Portfolio Analysis”, Management Science, 9(2), January 1963, pp 277–293.
  • Sharpe, W.F. “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk”. Journal of Finance, 19, 1964, pp 425–442.
  • Soenen, L.A. “The Optimal Currency Cock tail: A Tool for Strategic Foreign Exchange Management”. Management International Review, 25(2), 1985, pp. 12–23.
  • “Exploiting Relationships between Currencies to Mitigate Foreign Exchange Risk”. Management International Review, 28(4), 1988, pp 34–41.
  • Taylor, J.H. Global Investing for the 21st Century, Singapore,: Toppan.
  • Wendt, D. and S.N. Wong. “Investment Performance: Common Stocks versus Apartment Houses”. Journal of Finance, 20, December, 1965, pp 633–646.
  • Worzola, E. “Currency Risk and International Property Investments”. Journal of Property Valuation and Investment, 13(5), 1995, pp 23–38.
  • Ziobrowski, A.J. and R.J. Curcio. “Diversification Benefits of U.S. Real Estate to Foreign Investors”. Journal of Real Estate Research, 6(2), Summer, 1991, pp. 119–142.