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Is there a diversification paradox in real estate investment funds' value?

Author

Listed:
  • Pedro A. Fernandes
  • João Carvalho das Neves
  • Jorge Caiado

Abstract

Purpose - This paper studies diversification and value in the investment portfolios of (non-listed) Real Estate Investment Funds (REIFs) exploring how the value of diversification is captured by the market and by investors (beyond reported valuations). Design/methodology/approach - We apply the Herfindahl-Hirschman Index (HHI) to study the level of concentration versus diversification in the investment portfolios of REIFs (both in terms of segment and geographical diversification). We use a dataset from INREV with data from 62 investment portfolios, with an average of 86 REIFs per portfolio for the period of 2008–2020 (to study segment diversification). We use a second dataset from INREV with data from 30 investment portfolios with an average of 79 REIFs per portfolio for the period of 2005–2020 (to study geographical diversification). We employ a cluster analysis approach to identify common features among the investment funds. Findings - We conclude that (segment diversified) portfolios with higher degrees of leverage exhibit higher income yields, albeit diversification is captured indirectly through asset choices – more diversified portfolios tend to exhibit a stronger risk and return relationship. Also, geographical diversification creates value (more significantly by for the correct combination of countries carefully choosing what different geographies to group in the diversified portfolio). Research limitations/implications - One limitation of our study is that our portfolios are funds of funds, since the available data could not reach the asset detail, but we believe this does not compromise our results. Practical implications - Diversification leads to higher risk-adjusted returns which suggests that properties may be undervalued (market value) in the framework of the Gordon Model, contrary to expectations (regarding investment value). Originality/value - Investors capture the value of diversification differently, suggesting a gap between market value and investment value that can be explored.

Suggested Citation

  • Pedro A. Fernandes & João Carvalho das Neves & Jorge Caiado, 2024. "Is there a diversification paradox in real estate investment funds' value?," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 42(6), pages 554-575, August.
    • Handle: RePEc:eme:jpifpp:jpif-02-2024-0025
    DOI: 10.1108/JPIF-02-2024-0025
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    More about this item

    Keywords

    Real estate diversification; Herfindahl-Hirschman index; Investment portfolios; Cluster analysis; Non-hierarchical clustering; G11; G12; L25; R30; R39;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R39 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other

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