Abstract
In recent years, real estate has become a very popular investment choice for Iranian investors due to several interrelated economic and political reasons. The purpose of this study is to find out how real estate investors can gain diversification benefits from investing within the real estate sector across provinces of Iran. We use semi-annual data from selected provinces of Iran over the period of 1993–2014 and apply univariate Lagrange multiplier unit root tests with one and two structural breaks to the ratio of the provincial to national house and residential land prices respectively. We find diversification benefit can be gained by investing in housing markets across provinces because house prices in half of the sample provinces tend to drift away from house prices in the rest of the country. In addition, our results show that it is difficult to create an adequately diversified portfolio in a residential land market because shocks to the residential land prices of provinces ripple out across the nation. These findings should be valuable to domestic and foreign investors who are interested in the Iranian real estate sector, especially after the lifting of several international economic sanctions.
Highlights
Real estate has been a very important asset class for Iranian households and investors (Gholipour, Bazrafshan 2012) as this asset class makes up a large fraction of household wealth and investors’ portfolio
The Lagrange multiplier (LM) univariate unit root test is applied to the ratio of province to the national house and land prices to examine the ripple effect in Iranian housing and land markets
Based on model C, there is a clear evidence in supporting convergence or the ripple effect for land prices across provinces of Iran and, to a lesser degree, in house prices
Summary
Real estate has been a very important asset class for Iranian households and investors (Gholipour, Bazrafshan 2012) as this asset class makes up a large fraction of household wealth and investors’ portfolio. Real estate has become a more popular investment choice for Iranian investors due to several interrelated economic and political reasons. In the inflationary environment of Iran where the inflation rate, on average, was about 20 per cent over 2004–2014 (WDI 2015), real estate investment has been viewed as the. In the absence of effective property tax (and ineffective taxing system in general4), the investment demands for real estate are very beneficial for investors. The reasons mentioned above have contributed to the high level of real estate demand ( investment demand) in Iran. Alaedini and Fardanesh (2014) showed that around 40 to 60 per cent of the demand for housing is attributed to seeking an investment opportunity in Iran
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