Addae-Dapaah, K; Wee, S; Ebrahim, S; (2002) Real Estate Portfolio Diversification by Sources of Return. Journal of Real Estate Portfolio Management , 8 (1) pp. 1-15.

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Abstract

The basis of the superior performance of the contrarian strategy is a focus of lively debate in the literature of finance. In relation to real property, the contrarian strategy implies that properties with high running yield (i.e. value properties) could outperform properties with low running yield (i.e. growth properties). This intuitively provides a prima facie need to reflect real property cash flow patterns in diversification strategies. Williams (1995) was the first to hypothesize and demonstrate through statistical simulation that “the greater the relative balance of return (percentage) from operating and reversion, the more diversified the portfolio, and thus the better the portfolio performance”. Although our research, using empirical data from a pension fund confirms Williams’ conclusions, it was found that Williams’ model for calculating the diversification index needs refinement. After modifying the model to conform to the Markowitz routine, it was found that the association between the cash flow concentration level and the portfolio performance index, and between the diversification index and the portfolio performance index is stronger than depicted by Williams. This implies that diversification by sources of return could improve real estate portfolio performance.

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