london / paris: diversification benefits through intracity diversification
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London / Paris: Diversification Benefits through Intracity Diversification. Florian Heydenreich, Daniel Kohlert and Andreas Oehler Bamberg University, Germany Chair of Finance. ERES conference 2009 24th – 27th of July Stockholm. Heydenreich, Kohlert, Oehler. (1)Introduction. - PowerPoint PPT PresentationTRANSCRIPT
London / Paris: Diversification Benefits through Intracity Diversification
Florian Heydenreich, Daniel Kohlert and Andreas OehlerBamberg University, GermanyChair of Finance
ERES conference 200924th – 27th of July
Stockholm
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(1) Introduction
Researchers have made great efforts to refine real estate portfolio
diversification strategies under risk-return considerations.
Within geographic diversification, risk reduction can be achieved
through different strategies. (e.g. international, national, regional)
Only few studies have examined benefits of intracity diversification.
Real estate markets are local markets and assets in local submarkets
of a city may behave differently than the city in which they exist.
We examine intracity diversification opportunities for two of the most
important real estate investment markets in Europe, London and Paris.
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
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(2) Data and Methodology
DataIPD Investment Property DatabankAnnual Total return data for office buildings London: Return information for eight central postcode
districts Time period covered: 1981-2006 Paris: Return information for eleven submarkets Time period covered: 1998-2006
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
MethodologyMean-variance efficiency theory is used to analyze risk-return optimization opportunities through intracity diversification for both cities.
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London Office Total Return Statistics 1981-2006
Paris Office Total Return Statistics 1998-2006
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
(3) Results: Descriptives
Øρ = 0,92, ص = 11,30%, Øσ= 13,36%
Øρ = 0,82, ص = 12,10%, Øσ = 6,60%
EC1 EC2 EC3 EC4 WC1 WC2 W1 SW1Mean 10,94% 10,39% 9,46% 10,70% 12,77% 11,43% 12,33% 12,41%Std. Dev. 13,42% 11,92% 12,07% 12,19% 14,57% 14,45% 14,47% 13,82%
1e 2e 7e 8e 9e 10eMean 11,63% 11,28% 11,91% 12,00% 11,27% 11,31%Std. Dev. 6,23% 5,14% 5,00% 5,94% 7,15% 6,64%
12e 15e 16e 17e 19eMean 13,91% 11,22% 12,91% 12,47% 13,22%Std. Dev. 6,29% 5,54% 7,54% 9,02% 8,05%
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(3) Results: London 1981-2006
Efficient frontier:
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
Risk-return characteristics can be improved by intracity diversification.
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(3) Results: Paris 1998-2006
Efficient frontier:
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
Strong diversification benefits through optimally weighting the districts.
Benefits of well structured diversification strategy become more visible.
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(3) Results: London / Paris 1998-2006
Efficient frontier:
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
Combining the submarkets of both cities lead to much better risk
adjusted returns than the one-city strategies.
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(4) Conclusion
Intracity diversification can reduce unsystematic risk.
Portfolio managers, concentrating their investments in fewer markets,
benefit from reduced information and management costs.
Further research on the topic of intracity diversification: Other time periods, cities and property types should be
covered, as allthree variables may have important influences on the
obtainablediversification benefits.
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
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Thank you
for your
comments!
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
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References
Addae-Dapaah, K. and G. Yong, Currency risk and office invest ment in Asia Pacific, Real Estate Finance, 1998, 15:3, 67-85.Arnold, H. and C. Grossman, International Real Estate Investment: A realistic look at the issues, in: Pagliari, J., The Handbook of Real Estate Portfolio
Management, Chicago, first edition, 1995, 530-567.Brown, R., L. Li and K. Lusht, A Note on Intracity Geographic Diversification of Real Estate Portfolios: Evidence from Hong Kong, Journal of Real Estate Portfolio
Management, 2000, 6:2, 131-140.D’Arcy, E. and S. Lee, A Real Estate Portfolio Strategy for Europe: A Review of Options, Journal of Real Estate Portfolio Management, 1998, 4:2, 113-123.Eichholtz, P., M. Hoesli, B. MacGregor and N. Nanthakumaran, Real Estate Portfolio diversification by property type and region, Journal of Property Finance,
1995, 6:3, 39-59.Eleflat 2008, http://www.eleflat.co.uk/londonAreas.htmGoetzmann, W. and S. Wachter, Clustering Methods for Real Estate Portfolios, Real Estate Economics, 1995, 23:3, 271-310.Grissom, T., K. Wang, and J. Webb, The Spatial Equilibrium of Intra-Regional Rates of Return and the Implications for Real Estate Portfolio Diversification, Journal
of Real Estate Research, 1991, 7:1, 59-71.Hartzell, D., D. Shulman and C. Wurtzebach, Refining the Analysis of Regional Diversification for Income-Producing Real Estate, Journal of Real Estate Research,
1987, 2:2, 85-95.Jackson, C. and M. White, Challenging Traditional Real Estate Market Classifications for Investment Diversification, Journal of Real Estate Portfolio Management,
2005, 11:3, 307-321.Jones Lang LaSalle, European Capital Markets Bulletin 2007 and views for 2008, 2008.Journaldunet 2008, http://www.journaldunet.com/economie/magazine/expliquez-moi/isf-impot-sur-la-fortune-riche/paris/Lee, S. and S. Stevenson, Testing the statistical significance of sector and regional diversification, Journal of Property Investment & Finance, 2005, 23:5, 394-
411.Malizia, E. and R. Simons, Comparing Regional Classifications for Real Estate Portfolio Diversification, Journal of Real Estate Research, 1991, 6:1, 53-77.Markowitz, H., Portfolio Selection, Journal of Finance, 1952, 7:1, 77-91.McGreal, S., A. Adair, J. Berry and J. Webb, Institutional real estate portfolio diversification in Ireland and the UK, Journal of Property Investment & Finance, 2006,
24:2, 136-149.Mueller, G., Refining Economic Diversification Strategies for Real Estate Portfolios, Journal of Real Estate Research, 1993, 8:1, 55-68.Mueller, G., What Will the Next Real Estate Cycle Look Like?, Journal of Real Estate Portfolio Management, 2002, 8:2, 115-125Mueller, G. and B. Ziering, Real Estate Portfolio Diversification Using Economic Diversification, Journal of Real Estate Research, 1992, 7:4, 375-386.Nelson, T. and S. Nelson, Regional Models for Portfolio Diversification, Journal of Real Estate Portfolio Management, 2003, 9:1, 71-88.Rabianski, J. and P. Cheng, Intrametropolitan Spatial Diversifi cation, Journal of Real Estate Portfolio Management, 1997, 3:2, 117-128.Shilton, L. and Stanley, C., Spatial Filtering: Concentration or Dispersion of NCREIF Institutional Investment, Journal of Real Estate Research, 1995, 10:5, 569-
582.Sirmans, C. and E. Worzala, International Direct Real Estate Investment: A Review of the Literature, Urban Studies, 2003, 40:5-6, 1081–1114.Thomas, M. and Lee, S., The Impact of Exchanges Rates on International Real Estate Allocation, in: Journal of Real Estate Portfolio Management, 2006, 12:3, 277-291.Torto, R., Benefits and issues in global real estate investing: a review of the research, Journal of Real Estate Portfolio Management, 2002, 8:4, 38-40.Viezer, T., Evaluating Within Real Estate Diversification Strategies, Journal of Real Estate Portfolio Management, 2000, 6:1, 75-95.Wolverton, M., P. Cheng and W. Hardin, Real Estate Portfolio Risk Reduction through Intracity Diversification, Journal of Real Estate Portfolio Management, 1998,
4:1, 35-41.Wurtzebach, C., The Portfolio Construction Process, Prudential Real Estate Investors, 1998.Ziering, B. and R. Hess, A Further Note on Economic Versus Geographic Diversification, Real Estate Finance, 1995, 12:3, 53-60.
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
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Return Information
London Office Total Return Statistics 1981-2006
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
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Return Information
Paris Office Total Return Statistics 1998-2006
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
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London and Paris Submarket Overview
London Postcode Areas & Districts Districts of Paris
Data available for the following submarkets:
EC 1-4 (East Central), WC 1-2 (West Central), 1, 2, 7-10, 12, 15-17 and 19
SW 1 (South West) and W 1 (West)
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
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London submarkets
London postal areas
East London (E)East Central London (EC)North West London (NW)South West London (SW)West London (W)North London (N)South East London (SE)West Central London (WC)
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
Relevant London postal districts
EC 1EC 2EC 3EC 4SW 1
W 1
WC 1WC 2
Clerkenwell, Finsbury, Barbican area North eastern area of The City South eastern area of The City Western area of The City Westminster, Belgravia, Pimlico,
Victoria area West End, including Mayfair, Soho
and south Marylebone Bloomsbury & Gray's Inn areaHolborn / Strand / Covent Garden
area
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Paris submarkets
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
Submarket Name Submarket Name
1 Louvre 11 Popincourt
2 Bourse 12 Reuilly
3 Temple 13 Gobelins
4 Hôtel-de-Ville 14 Observatoire
5 Panthéon 15 Vaugirard
6 Luxembourg 16 Passy
7 Palais-Bourbon 17 Batignolles-Monceau
8 Élysée 18 Butte-Montmartre
9 Opéra 19 Buttes-Chaumont
10 Enclos-St-Laurent 20 Ménilmontant
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Correlation Analysis
London submarkets – Correlation coefficients (1981-2006)
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
EC1 EC2 EC3 EC4 WC1 WC2 W1 SW1
EC1 1,00
EC2 0,92 1,00
EC3 0,91 0,97 1,00
EC4 0,92 0,96 0,99 1,00
WC1 0,94 0,81 0,82 0,85 1,00
WC2 0,95 0,91 0,91 0,92 0,96 1,00
W1 0,95 0,89 0,89 0,91 0,96 0,99 1,00
SW1 0,93 0,85 0,88 0,90 0,96 0,97 0,97 1,00
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Efficient frontier
London – Percentage allocation of submarkets
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
Portf. Return 10,19% 10,25% 10,50% 10,75% 11,00% 11,25% 11,50% 11,75% 12,00% 12,25% 12,50% 12,75% 12,77%
Portf. Std. Dev. 11,77% 11,77% 11,79% 11,84% 11,93% 12,09% 12,31% 12,59% 12,92% 13,31% 13,76% 14,48% 14,57%
Districts Percentage Allocation
EC1
EC2 53,19% 53,97% 57,38% 59,97% 53,79% 47,62% 41,44% 35,26% 25,85% 14,65% 3,44%
EC3 28,53% 25,47% 12,15%
EC4 17,61% 18,60% 22,89% 26,40% 20,34% 14,28% 8,23% 2,17%
WC1 1,25% 7,18% 13,10% 19,03% 24,96% 31,22% 37,67% 44,12% 94,47% 100,00%
WC2
W1
SW1 0,67% 1,96% 7,58% 12,38% 18,69% 24,99% 31,30% 37,61% 42,93% 47,68% 52,44% 5,53%
No entry: District not relevant in the calculation of the efficient frontier.
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Correlation Analysis
Paris submarkets – Correlation coefficients (1998-2006)
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
1e 2e 7e 8e 9e 10e 12e 15e 16e 17e 19e
1e 1,00
2e 0,72 1,00
7e 0,79 0,68 1,00
8e 0,93 0,91 0,83 1,00
9e 0,87 0,95 0,76 0,96 1,00
10e 0,89 0,87 0,72 0,93 0,92 1,00
12e 0,86 0,79 0,65 0,88 0,90 0,81 1,00
15e 0,86 0,83 0,69 0,92 0,93 0,87 0,87 1,00
16e 0,72 0,80 0,48 0,81 0,85 0,72 0,95 0,84 1,00
17e 0,67 0,89 0,66 0,83 0,92 0,72 0,85 0,85 0,86 1,00
19e 0,84 0,86 0,82 0,93 0,89 0,89 0,67 0,87 0,60 0,74 1,00
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Efficient frontier
Paris – Percentage allocation of submarkets
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
Portf. Return 11,58% 11,75% 12,00% 12,25% 12,50% 12,75% 13,00% 13,25% 13,50% 13,75% 13,91%
Portf. Std. Dev. 4,51% 4,53% 4,58% 4,65% 4,76% 4,91% 5,09% 5,34% 5,65% 6,02% 6,29%
Districts Percentage Allocation
1e
2e 37,44% 34,53% 30,87% 24,12% 15,11% 6,10%
7e 48,56% 50,21% 51,17% 51,22% 50,59% 49,96% 45,50% 33,02% 20,53% 7,05%
8e
9e
10e
12e 6,14% 15,25% 24,66% 34,30% 43,94% 54,50% 66,98% 79,47% 90,08% 100,00%
15e 14,00% 9,13% 2,71%
16e
17e
19e 2,87% No entry: District not relevant in the calculation of the efficient frontier.
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Correlation Analysis
London / Paris Paris submarkets – Correlation coefficients (1998-2006)
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
EC1 EC2 EC3 EC4 WC1 WC2 W1 SW1 1e 2e 7e 8e 9e 10e 12e 15e 16e 17e 19e
EC1 1,00
EC2 0,92 1,00
EC3 0,91 0,97 1,00
EC4 0,89 0,97 0,99 1,00
WC1 0,96 0,95 0,93 0,90 1,00
WC2 0,94 0,97 0,97 0,96 0,96 1,00
W1 0,90 0,91 0,94 0,94 0,92 0,98 1,00
SW1 0,87 0,92 0,95 0,95 0,92 0,98 0,99 1,00
1e 0,74 0,75 0,80 0,81 0,74 0,81 0,83 0,83 1,00
2e 0,73 0,77 0,67 0,73 0,71 0,73 0,68 0,70 0,72 1,00
7e 0,72 0,84 0,88 0,87 0,81 0,88 0,87 0,92 0,79 0,68 1,00
8e 0,78 0,81 0,78 0,82 0,79 0,84 0,83 0,85 0,93 0,91 0,83 1,00
9e 0,77 0,80 0,75 0,78 0,75 0,78 0,74 0,74 0,87 0,95 0,76 0,96 1,00
10e 0,61 0,70 0,67 0,74 0,58 0,69 0,70 0,71 0,89 0,87 0,72 0,93 0,92 1,00
12e 0,75 0,74 0,69 0,68 0,73 0,74 0,71 0,68 0,86 0,79 0,65 0,88 0,90 0,81 1,00
15e 0,58 0,58 0,55 0,58 0,59 0,60 0,59 0,61 0,86 0,83 0,69 0,92 0,93 0,87 0,87 1,00
16e 0,68 0,60 0,51 0,51 0,63 0,61 0,58 0,53 0,72 0,80 0,48 0,81 0,85 0,72 0,95 0,84 1,00
17e 0,73 0,74 0,64 0,64 0,74 0,68 0,58 0,60 0,67 0,89 0,66 0,83 0,92 0,72 0,85 0,85 0,86 1,00
19e 0,66 0,70 0,70 0,77 0,67 0,72 0,74 0,78 0,84 0,86 0,82 0,93 0,89 0,89 0,67 0,87 0,60 0,74 1,00
ØρL,P = 0,72
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Efficient frontier
London / Paris Percentage allocation of submarkets
Heydenreich, Kohlert, Oehler
London / Paris: Diversification Benefits through Intracity Diversification
Portf. Return 11,58% 11,75% 12,25% 12,75% 13,25% 13,75% 14,25% 14,75% 15,25% 15,75% 16,00% 16,19%
Portf. Std. Dev. 4,51% 4,53% 4,65% 4,91% 5,27% 5,70% 6,19% 6,74% 7,44% 8,38% 8,92% 9,35%
Districts Percentage of allocation
EC1
EC2
EC3
EC4
WC1 7,53% 17,29% 27,06% 36,83% 58,74% 80,67% 91,64% 100,00%
WC2
W1
SW1
1e
2e 37,44% 34,52% 24,12% 6,10%
7e 48,56% 50,21% 51,22% 49,96% 41,59% 27,73% 13,88% 0,03%
8e
9e
10e
12e 6,14% 24,67% 43,94% 50,89% 54,98% 59,06% 63,15% 41,26% 19,33% 8,36%
15e 14,00% 9,13%
16e
17e
19e