Real Estate Diversification Benefits

Abstract

Diversification benefits are shown to vary inversely with the correlation between asset returns. The present study estimates average correlation coefficients between real estate returns from property-specific data of an internationally diversified real estate fund in the Netherlands. It is found that diversification benefits within the United States are much larger than on the European Continent. The low correlation found between U.S. real estate returns implies that portfolios of small numbers of U.S. properties would require large return premia. Also, the study helps to explain why financial intermediaries exist in the real estate industry and when investors should consider employing them.

Keywords: investment, portfoilio management, diversification, real estate

JEL Classification: G11