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Abstract
We investigate the impact of the geographical investment focus of real estate investment trusts (REITs) in South Africa on their potential diversification benefits for foreign REIT investors. We focus on S.A. REITs as a laboratory as they vary in their geographical investment focus. In particular, some S.A. REITs predominantly invest in commercial real estate in South Africa while others predominantly invest in developed markets in Europe. Using the perspective of a foreign investor holding U.S. REITs, we find that S.A. REITs with foreign holdings have superior diversification benefits for foreign investors, in terms of portfolio variance and Sharpe ratio, than S.A. REITs with predominantly domestic holdings. Thus, while emerging market REITs provide diversification benefits to foreign investors, the exposure of these REITs to commercial real estate markets in developed countries further increases these benefits. Explanations include emerging country-specific risks.
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