Portfolio Diversification across U.S. Gateway and Non-Gateway Real Estate Markets

Martin Hoesli; Louis  Johner

doi:10.1080/08965803.2022.2038902

Portfolio Diversification across U.S. Gateway and Non-Gateway Real Estate Markets

Martin Hoesli, Louis Johner^* (Corresponding Author)

^*Corresponding author for this work

Accountancy & Finance, Accountancy

University of Geneva

Research output: Contribution to journal › Article › peer-review

5 Citations (Scopus)

15 Downloads (Pure)

Abstract

Using simulation analysis and property-level data for the U.S., we compare performance metrics for portfolios containing varying proportions of gateway and non-gateway markets. Risk-adjusted performance is found to be similar across types of markets. Gateway markets have higher appreciation and total returns, while non-gateway markets exhibit higher income returns even after accounting for capital expenditures. Downside risk appears to be slightly greater for gateway markets than for non-gateway markets; however, full drawdown and recovery lengths tend to be shorter for gateway markets. Systematic risk is found to be constant across types of markets. We show that discriminating between gateway and non-gateway markets is useful for mixed-asset diversification purposes, with the former type of markets appearing in risky portfolios and the latter in low-risk portfolios. By considering a large spectrum of performance metrics in a realistic investment setting, the results should provide investors with valuable information when allocating funds across gateway and non-gateway markets. The paper also provides insights regarding how best to define gateway markets.

Original language	English
Pages (from-to)	523-552
Number of pages	30
Journal	Journal of Real Estate Research
Volume	44
Issue number	4
Early online date	14 Apr 2022
DOIs	https://doi.org/10.1080/08965803.2022.2038902
Publication status	Published - 2022

Bibliographical note

Acknowledgments
We are grateful to the Real Estate Research Institute (RERI) for having supported this project financially. Our RERI mentors, Martha Peyton and Greg MacKinnon, seminar participants at the Royal Institute of Technology in Stockholm (Sweden), the University of Neuchâtel (Switzerland), and the European Commercial Real Estate Data Alliance (E-CREDA) annual conference provided many useful comments and suggestions. Two anonymous reviewers provided very constructive remarks that have much improved the quality of the article. We also thank NCREIF for providing us with the data. Jeff Fisher was very helpful in helping us secure those data and provided many valuable inputs regarding the data as well as the method that NCREIF used until recently to produce its TBI. The usual disclaimer applies.

Funding
This article was supported financially by the Real Estate Research Institute.

Keywords

Commercial Real Estate
Gateway Markets
Non-Gateway Markets
Diversification
Risk-Adjusted Performance
Downside Risk

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10.1080/08965803.2022.2038902Licence: CC BY

Hoesli_etal_JRER_Portfolio_Diversification_Across_AAM
This is an Accepted Manuscript of an article published by Taylor & Francis in Journal of Real Estate Research] on [date of publication], available online: http://www.tandfonline.com/[Article DOI]
Accepted author manuscript, 1.78 MBLicence: Unspecified
Hoesli_etal_JRER_Portfolio_Diversification_Across_VoR
©2022 The Author(s). Published with license by Taylor & Francis Group, LLC. This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way
Final published version, 4.14 MBLicence: CC BY-NC-ND

Cite this

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abstract = "Using simulation analysis and property-level data for the U.S., we compare performance metrics for portfolios containing varying proportions of gateway and non-gateway markets. Risk-adjusted performance is found to be similar across types of markets. Gateway markets have higher appreciation and total returns, while non-gateway markets exhibit higher income returns even after accounting for capital expenditures. Downside risk appears to be slightly greater for gateway markets than for non-gateway markets; however, full drawdown and recovery lengths tend to be shorter for gateway markets. Systematic risk is found to be constant across types of markets. We show that discriminating between gateway and non-gateway markets is useful for mixed-asset diversification purposes, with the former type of markets appearing in risky portfolios and the latter in low-risk portfolios. By considering a large spectrum of performance metrics in a realistic investment setting, the results should provide investors with valuable information when allocating funds across gateway and non-gateway markets. The paper also provides insights regarding how best to define gateway markets.",

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N2 - Using simulation analysis and property-level data for the U.S., we compare performance metrics for portfolios containing varying proportions of gateway and non-gateway markets. Risk-adjusted performance is found to be similar across types of markets. Gateway markets have higher appreciation and total returns, while non-gateway markets exhibit higher income returns even after accounting for capital expenditures. Downside risk appears to be slightly greater for gateway markets than for non-gateway markets; however, full drawdown and recovery lengths tend to be shorter for gateway markets. Systematic risk is found to be constant across types of markets. We show that discriminating between gateway and non-gateway markets is useful for mixed-asset diversification purposes, with the former type of markets appearing in risky portfolios and the latter in low-risk portfolios. By considering a large spectrum of performance metrics in a realistic investment setting, the results should provide investors with valuable information when allocating funds across gateway and non-gateway markets. The paper also provides insights regarding how best to define gateway markets.

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Portfolio Diversification across U.S. Gateway and Non-Gateway Real Estate Markets

Abstract

Bibliographical note

Keywords

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