The Relative Effect of Property Type and Country Factors in Reduction of Risk of Internationally Diversified Real Estate Portfolios

Abstract

We examine and test the merits of diversifying portfolios of real estate securities internationally and by property type. Our analysis covers the period February 1990 through November 2002. Using data from the Global Property Research General Property Securities Index, which has monthly prices for four property type indices in twenty-one countries, we decompose country and property type sources of variation in real estate security returns. The analysis shows that property type effects are much smaller than country effects. Property type specialization explains only four percent of the variance of national real estate securities index returns. Because property type effects are so small, counry diversification is a more effective tool for achieving risk reduction than property type diversification.