Institutional real estate portfolio diversification in Ireland and the UK

Abstract

PurposeFew countries have sufficiently long and detailed returns data for real estate to permit sophisticated analysis. This paper aims to examine the potential diversification of private real estate investments using returns data for major regional centres in Ireland and the UK.Design/methodology/approachOptimal real estate‐only portfolios are constructed using total returns, income returns and appreciation returns for office and retail real estate in ten cities within Ireland and the UK. The analysis uses IPD data for the period 1984 to 2002. Total return, income return and appreciation returns are treated as separate asset streams in the modelling of portfolios.FindingsThe results show different risk levels; in particular the income stream carries low risk, whereas the capital appreciation element is much more volatile and risky. Optimal portfolios, office or retail, whether income, appreciation or total returns, indicate that provincial markets perform well and are capable of pushing London out of the optimised portfolios.Research limitations/implicationsLimitations stem from the optimal portfolios being based on return series without a consideration of market depth. Future research will seek to construct weighted portfolios.Originality/valueThe paper constructs optimal portfolios for three scenarios: low return; medium return; and high return across sectors, return streams and major regional centres in Ireland and the UK. The results show that regional centres perform well and can exclude London real estate from optimal portfolios.