IDEAS home Printed from https://ideas.repec.org/a/gam/jjrfmx/v17y2024i4p160-d1376395.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1911-8074/17/4/160/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1911-8074/17/4/160/
    Download Restriction: no
    ---><---

    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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yun Luo & Kwong Wing Chau, 2013. "The Impact of Real Estate Market Transparency on Dynamics between Direct and Indirect Real Estate," ERES eres2013_35, European Real Estate Society (ERES).
    2. K.W. Chau & Bryan D. MacGregor & Gregory M. Schwann, 2001. "Price discovery in the Hong Kong real estate market," Journal of Property Research, Taylor & Francis Journals, vol. 18(3), pages 187-216.
    3. Oikarinen, Elias, 2006. "Price Linkages between Stock, Bond and Housing Markets - Evidence from Finnish Data," Discussion Papers 1004, The Research Institute of the Finnish Economy.
    4. Hsu, Chih-Chiang & Yau, Ruey & Wu, Jyun-Yi, 2009. "Asymmetric Exchange Rate Exposure and Industry Characteristics : Evidence from Japanese Data," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 50(1), pages 57-69, June.
    5. Nafeesa Yunus & J. Hansz & Paul Kennedy, 2012. "Dynamic Interactions Between Private and Public Real Estate Markets: Some International Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 1021-1040, November.
    6. Rainer Masera, 2011. "Taking the moral hazard out of banking: the next fundamental step in financial reform," PSL Quarterly Review, Economia civile, vol. 64(257), pages 105-142.
    7. Gerlach, Richard & Wilson, Patrick & Zurbruegg, Ralf, 2006. "Structural breaks and diversification: The impact of the 1997 Asian financial crisis on the integration of Asia-Pacific real estate markets," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 974-991, October.
    8. Neal Maroney & Atsuyuki Naka, 2006. "Diversification Benefits of Japanese Real Estate Over the Last Four Decades," The Journal of Real Estate Finance and Economics, Springer, vol. 33(3), pages 259-274, November.
    9. Camilo Serrano & Martin Hoesli, 2012. "Fractional Cointegration Analysis of Securitized Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 44(3), pages 319-338, April.
    10. Pat Wilson & Ralf Zurbruegg, 2003. "International Diversification of Real Estate Assets - Is it Worth It? Evidence from the Literature," Working Paper Series 126, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    11. Walter Boudry & N. Coulson & Jarl Kallberg & Crocker Liu, 2012. "On the Hybrid Nature of REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 230-249, January.
    12. Jinliang Li & Robert Mooradian & Shiawee Yang, 2009. "The Information Content of the NCREIF Index," Journal of Real Estate Research, Taylor & Francis Journals, vol. 31(1), pages 93-116, January.
    13. J. Andrew Hansz & Ying Zhang & Tingyu Zhou, 2017. "An Investigation into the Substitutability of Equity and Mortgage REITs in Real Estate Portfolios," The Journal of Real Estate Finance and Economics, Springer, vol. 54(3), pages 338-364, April.
    14. Nafeesa Yunus & Peggy Swanson, 2007. "Modelling Linkages between US and Asia‐Pacific Securitized Property Markets," Journal of Property Research, Taylor & Francis Journals, vol. 24(2), pages 95-122.
    15. Hui-Na Lin & Wo-Chiang Lee, 2015. "Threshold Effects in the Relationships of REITs and Other Financial Securities in Developed Countries," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(3), pages 426-438, March.
    16. Kim Hiang Liow, 2012. "Volatility interdependence in European securitised real estate markets: who is the most influential?," ERES eres2012_020, European Real Estate Society (ERES).
    17. Laura Ryan, 2010. "Nowhere to hide: an analysis of investment opportunities in listed property markets during financial market crises," Journal of Property Research, Taylor & Francis Journals, vol. 28(2), pages 97-131, May.
    18. Faten Ben Bouheni & Manish Tewari, 2023. "Common risk factors and risk–return trade-off for REITs and treasuries," Journal of Asset Management, Palgrave Macmillan, vol. 24(5), pages 374-395, September.
    19. Jian Yang & James Kolari & Guozhong Zhu, 2005. "European public real estate market integration," Applied Financial Economics, Taylor & Francis Journals, vol. 15(13), pages 895-905.
    20. Foort Hamelink & Martin Hoesli, 2004. "What Factors Determine International Real Estate Security Returns?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(3), pages 437-462, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jjrfmx:v:17:y:2024:i:4:p:160-:d:1376395. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.