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The Diversification Benefits of Foreign Real Estate: Evidence from 40 Years of Data

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  • C. Mitchell Conover

    (The Robins School of Business, University of Richmond, Richmond, VA 23173, USA)

  • Joseph D. Farizo

    (The Robins School of Business, University of Richmond, Richmond, VA 23173, USA)

  • H. Swint Friday

    (College of Business, Texas A&M University—Corpus Christi, Corpus Christi, TX 78412, USA)

  • David S. North

    (The Robins School of Business, University of Richmond, Richmond, VA 23173, USA)

Abstract

We investigate the potential of global real estate to improve the long-term performance of a US equity portfolio, utilizing a recent dataset of 40 years’ worth of US stocks, US real estate, 13 foreign stock markets, and 13 foreign real estate markets across diverse regions. Despite a modest performance in terms of risk and return, foreign real estate has consistently lower correlations with US stocks compared to foreign equities. Rolling correlation analysis indicates that foreign real estate markets remain relatively segmented compared to foreign equity, despite increasing financial market correlations over time. Efficient frontier analysis demonstrates that portfolios including foreign real estate consistently outperform those limited to US stocks and US real estate or those including foreign stocks, indicating the importance of foreign real estate in optimizing portfolio performance. Subperiod analysis reveals that foreign real estate retains its diversification benefits even in the latter, more integrated period. Our results are robust when using Conditional Value-at-Risk as a measure of risk. Overall, our findings highlight the persistent diversification benefits and superior risk-adjusted returns from incorporating foreign real estate into US equity portfolios.

Suggested Citation

  • C. Mitchell Conover & Joseph D. Farizo & H. Swint Friday & David S. North, 2024. "The Diversification Benefits of Foreign Real Estate: Evidence from 40 Years of Data," JRFM, MDPI, vol. 17(4), pages 1-15, April.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:4:p:160-:d:1376395
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    References listed on IDEAS

    as
    1. S. Michael Giliberto, 1990. "Equity Real Estate Investment Trusts and Real Estate Returns," Journal of Real Estate Research, American Real Estate Society, vol. 5(2), pages 259-264.
    2. Crocker H. Liu & Jianping Mei, 1998. "The Predictability of International Real Estate Markets, Exchange Rate Risks and Diversification Consequences," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(1), pages 3-39, March.
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