International Diversification in Frontier Real Estate Markets
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Sulaiman T. Al-Abduljader
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International Real Estate Review
The paper investigates the effects of international diversification in reducing risk. A test is applied on real estate returns by analyzing global portfolios that invest in the real estate of Gulf Cooperating Countries (GCC). The correlations between markets are not low enough to produce effective diversification. Nine out of the twelve portfolios have produced high enough correlations that when opposite positions (long and short) are taken, only then we begin to see significant reduction in risk. When comparing the effects of the real estate of the GCC with those of the real estate of Brazil, Russia, India and China (BRIC) in the context of a global equity portfolio, both the real estate of the GCC and BRIC do not produce diversification benefits when a long position is taken in developed markets. Nonetheless, when taking a long position in the real estate of the GCC, effective diversification is found when taking a short position in the developed markets. A similar case can also be concluded when taking a long position in the real estate of the BRIC countries and shorting the developed markets. The results suggest serious concerns on effective diversification among global investors with the current long only exposure to real estate in the region and suggests the introduction of shorting financial instruments for active hedging and portfolio optimization.
Diversification, Real Estate, Emerging Markets, Asset Allocation, Capital Markets, Investment Management