Real Estate Investment Portfolios

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Overall, McGreal et al. (2009) find that UK property market dominates the high-risk portfolios, while the US property market does not appear in high-risk portfolios for any of the three property types. In addition, institutional investors can get benefits from diversifying the international real estate portfolios, and they take the office property as one of the most popular types of real estate investment. In this research, the role of office property in the private real estate portfolios is uncertain. However, this study contributes evidence to the literature that diversification advantages do exist across international property markets – in this case, US and UK real estate markets. In a similar way, McGreal et al. (2006) model office and retail real estate portfolios under different risk levels by analysing income and capital appreciation returns separately, and take account of the data limitation, thereby choosing main ten regional centres within the United Kingdom and Ireland to examine diversification strategies of real estate investments. This study applies three different levels of return (low, medium, and high) for office and retail property across ten cities to build optimal portfolios for investors. The authors emphasise that income and capital appreciation returns perform significantly different in regards to risks: income returns involve lower risk while capital appreciation carries relatively higher risk and more volatile for institutional investors. Furthermore, the authors argue that a regional centre performs significantly better than other regions in generating investment returns.

Lee and Byrne (1998) use annual Keycentres data in the United Kingdom and apply a mean absolute deviation portfolio approach (MAD) to investigate whether portfolio diversification is better by region, sector or by functional group. In addition, the authors emphasise that applying Modern Portfolio theory to construct real estate portfolios is a relatively more rational approach, since it offers a top-down thinking direction for investors: first, to decide the share of each category of asset that assigned to the portfolio; second, to optimize the allocation within each category. This research considers three main types of property (retail, industrial, and office) and classifies regions into three types (standard, super, and functional) based on economic standards. After comparing the classification performance, they find that diversification through a super region performs better than any other strategies. However, Seiler et al. (1999) states that in reality most institutional investors choose diversification by property type. Although these two studies have different opinions, they both behind the similar idea that is to maximize the variety between portfolios, while to maximize the similarity within a portfolio.

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