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London / Paris: Diversification Benefits through Intracity Diversification

London / Paris: Diversification Benefits through Intracity Diversification. Florian Heydenreich, Daniel Kohlert and Andreas Oehler Bamberg University, Germany Chair of Finance. ERES conference 2009 24th – 27th of July Stockholm. Heydenreich, Kohlert, Oehler. (1) Introduction.

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London / Paris: Diversification Benefits through Intracity Diversification

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  1. London / Paris: Diversification Benefits through Intracity Diversification Florian Heydenreich, Daniel Kohlert and Andreas OehlerBamberg University, Germany Chair of Finance ERES conference 2009 24th – 27th of July Stockholm

  2. Heydenreich, Kohlert, Oehler (1) Introduction Researchers have made great efforts to refine real estate portfolio diversification strategies under risk-return considerations. Within geographic diversification, risk reduction can be achieved through different strategies. (e.g. international, national, regional) Only few studies have examined benefits of intracity diversification. Real estate markets are local markets and assets in local submarkets of a city may behave differently than the city in which they exist. We examine intracity diversification opportunities for two of the most important real estate investment markets in Europe, London and Paris. London / Paris: Diversification Benefits through Intracity Diversification

  3. Heydenreich, Kohlert, Oehler (2) Data and Methodology Data IPD Investment Property Databank Annual Total return data for office buildings London: Return information for eight central postcode districts Time period covered: 1981-2006 Paris: Return information for eleven submarkets Time period covered: 1998-2006 Methodology Mean-variance efficiency theory is used to analyze risk-return optimization opportunities through intracity diversification for both cities. London / Paris: Diversification Benefits through Intracity Diversification 3

  4. Heydenreich, Kohlert, Oehler (3) Results: Descriptives London Office Total Return Statistics 1981-2006 Paris Office Total Return Statistics 1998-2006 Øρ = 0,92, ص = 11,30%, Øσ= 13,36% Øρ = 0,82, ص = 12,10%, Øσ = 6,60% London / Paris: Diversification Benefits through Intracity Diversification 4

  5. Heydenreich, Kohlert, Oehler (3) Results: London 1981-2006 Efficient frontier: Risk-return characteristics can be improved by intracity diversification. London / Paris: Diversification Benefits through Intracity Diversification 5

  6. Heydenreich, Kohlert, Oehler (3) Results: Paris 1998-2006 Efficient frontier: Strong diversification benefits through optimally weighting the districts. Benefits of well structured diversification strategy become more visible. London / Paris: Diversification Benefits through Intracity Diversification 6

  7. Heydenreich, Kohlert, Oehler (3) Results: London / Paris 1998-2006 Efficient frontier: Combining the submarkets of both cities lead to much better risk adjusted returns than the one-city strategies. London / Paris: Diversification Benefits through Intracity Diversification 7

  8. Heydenreich, Kohlert, Oehler (4) Conclusion Intracity diversification can reduce unsystematic risk. Portfolio managers, concentrating their investments in fewer markets, benefit from reduced information and management costs. Further research on the topic of intracity diversification: Other time periods, cities and property types should be covered, as all three variables may have important influences on the obtainable diversification benefits. London / Paris: Diversification Benefits through Intracity Diversification 8

  9. Heydenreich, Kohlert, Oehler Thank you for your comments! London / Paris: Diversification Benefits through Intracity Diversification 9

  10. Heydenreich, Kohlert, Oehler References Addae-Dapaah, K. and G. Yong, Currency risk and office invest­ment in Asia Pacific, Real Estate Finance, 1998, 15:3, 67-85. Arnold, H. and C. Grossman, International Real Estate Investment: A realistic look at the issues, in: Pagliari, J., The Handbook of Real Estate Portfolio Management, Chicago, first edition, 1995, 530-567. Brown, R., L. Li and K. Lusht, A Note on Intracity Geographic Diversification of Real Estate Portfolios: Evidence from Hong Kong, Journal of Real Estate Portfolio Management, 2000, 6:2, 131-140. D’Arcy, E. and S. Lee, A Real Estate Portfolio Strategy for Europe: A Review of Options, Journal of Real Estate Portfolio Management, 1998, 4:2, 113-123. Eichholtz, P., M. Hoesli, B. MacGregor and N. Nanthakumaran, Real Estate Portfolio diversification by property type and region, Journal of Property Finance, 1995, 6:3, 39-59. Eleflat 2008, http://www.eleflat.co.uk/londonAreas.htm Goetzmann, W. and S. Wachter, Clustering Methods for Real Estate Portfolios, Real Estate Economics, 1995, 23:3, 271-310. Grissom, T., K. Wang, and J. Webb, The Spatial Equilibrium of Intra-Regional Rates of Return and the Implications for Real Estate Portfolio Diversification, Journal of Real Estate Research, 1991, 7:1, 59-71. Hartzell, D., D. Shulman and C. Wurtzebach, Refining the Analysis of Regional Diversification for Income-Producing Real Estate, Journal of Real Estate Research, 1987, 2:2, 85-95. Jackson, C. and M. White, Challenging Traditional Real Estate Market Classifications for Investment Diversification, Journal of Real Estate Portfolio Management, 2005, 11:3, 307-321. Jones Lang LaSalle, European Capital Markets Bulletin 2007 and views for 2008, 2008. Journaldunet 2008, http://www.journaldunet.com/economie/magazine/expliquez-moi/isf-impot-sur-la-fortune-riche/paris/ Lee, S. and S. Stevenson, Testing the statistical significance of sector and regional diversification, Journal of Property Investment & Finance, 2005, 23:5, 394-411. Malizia, E. and R. Simons, Comparing Regional Classifications for Real Estate Portfolio Diversification, Journal of Real Estate Research, 1991, 6:1, 53-77. Markowitz, H., Portfolio Selection, Journal of Finance, 1952, 7:1, 77-91. McGreal, S., A. Adair, J. Berry and J. Webb, Institutional real estate portfolio diversification in Ireland and the UK, Journal of Property Investment & Finance, 2006, 24:2, 136-149. Mueller, G., Refining Economic Diversification Strategies for Real Estate Portfolios, Journal of Real Estate Research, 1993, 8:1, 55-68. Mueller, G., What Will the Next Real Estate Cycle Look Like?, Journal of Real Estate Portfolio Management, 2002, 8:2, 115-125 Mueller, G. and B. Ziering, Real Estate Portfolio Diversification Using Economic Diversification, Journal of Real Estate Research, 1992, 7:4, 375-386. Nelson, T. and S. Nelson, Regional Models for Portfolio Diversification,Journal of Real Estate Portfolio Management, 2003, 9:1, 71-88. Rabianski, J. and P. Cheng, Intrametropolitan Spatial Diversifi­cation, Journal of Real Estate Portfolio Management, 1997, 3:2, 117-128. Shilton, L. and Stanley, C., Spatial Filtering: Concentration or Dispersion of NCREIF Institutional Investment, Journal of Real Estate Research, 1995, 10:5, 569-582. Sirmans, C. and E. Worzala, International Direct Real Estate Investment: A Review of the Literature, Urban Studies, 2003, 40:5-6, 1081–1114. Thomas, M. and Lee, S., The Impact of Exchanges Rates on International Real Estate Allocation, in: Journal of Real Estate Portfolio Management, 2006, 12:3, 277-291. Torto, R., Benefits and issues in global real estate investing: a review of the research, Journal of Real Estate Portfolio Management, 2002, 8:4, 38-40. Viezer, T., Evaluating Within Real Estate Diversification Strategies, Journal of Real Estate Portfolio Management, 2000, 6:1, 75-95. Wolverton, M., P. Cheng and W. Hardin, Real Estate Portfolio Risk Reduction through Intracity Diversification, Journal of Real Estate Portfolio Management, 1998, 4:1, 35-41. Wurtzebach, C., The Portfolio Construction Process, Prudential Real Estate Investors, 1998. Ziering, B. and R. Hess, A Further Note on Economic Versus Geographic Diversification, Real Estate Finance, 1995, 12:3, 53-60. London / Paris: Diversification Benefits through Intracity Diversification 10

  11. Heydenreich, Kohlert, Oehler Return Information London Office Total Return Statistics 1981-2006 London / Paris: Diversification Benefits through Intracity Diversification 11

  12. Heydenreich, Kohlert, Oehler Return Information Paris Office Total Return Statistics 1998-2006 London / Paris: Diversification Benefits through Intracity Diversification 12

  13. Heydenreich, Kohlert, Oehler London and Paris Submarket Overview London Postcode Areas & Districts Districts of Paris Data available for the following submarkets: EC 1-4 (East Central), WC 1-2 (West Central), 1, 2, 7-10, 12, 15-17 and 19 SW 1 (South West) and W 1 (West) London / Paris: Diversification Benefits through Intracity Diversification 13

  14. Heydenreich, Kohlert, Oehler London submarkets London postal areas East London (E) East Central London (EC) North West London (NW) South West London (SW) West London (W) North London (N) South East London (SE) West Central London (WC) Relevant London postal districts EC 1 EC 2 EC 3 EC 4 SW 1 W 1 WC 1 WC 2 Clerkenwell, Finsbury, Barbican area North eastern area of The City South eastern area of The City Western area of The City Westminster, Belgravia, Pimlico, Victoria area West End, including Mayfair, Soho and south Marylebone Bloomsbury & Gray's Inn area Holborn / Strand / Covent Garden area London / Paris: Diversification Benefits through Intracity Diversification 14

  15. Heydenreich, Kohlert, Oehler Paris submarkets London / Paris: Diversification Benefits through Intracity Diversification 15

  16. Heydenreich, Kohlert, Oehler Correlation Analysis London submarkets – Correlation coefficients (1981-2006) London / Paris: Diversification Benefits through Intracity Diversification

  17. Heydenreich, Kohlert, Oehler Efficient frontier London – Percentage allocation of submarkets London / Paris: Diversification Benefits through Intracity Diversification 17

  18. Heydenreich, Kohlert, Oehler Correlation Analysis Paris submarkets – Correlation coefficients (1998-2006) London / Paris: Diversification Benefits through Intracity Diversification 18

  19. Heydenreich, Kohlert, Oehler Efficient frontier Paris – Percentage allocation of submarkets London / Paris: Diversification Benefits through Intracity Diversification 19

  20. Heydenreich, Kohlert, Oehler Correlation Analysis London / Paris Paris submarkets – Correlation coefficients (1998-2006) ØρL,P = 0,72 20 London / Paris: Diversification Benefits through Intracity Diversification

  21. Heydenreich, Kohlert, Oehler Efficient frontier London / Paris Percentage allocation of submarkets London / Paris: Diversification Benefits through Intracity Diversification 21

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