Continental Factors Revisited: Evidence from International Property Shares

Given the local character of real estate market, real estate investments have always been identified as an opportunity for diversifying internationally. Low international coherence can reduce the risk of both private and professional multi asset investment portfolios. Early research confirmed, showing that US investors would greatly benefit from spreading their real estate portfolios abroad. At the same time Eicholtz et al. (1996) showed that real estate returns were driven by continental factors. This subject is relevant for determining the country allocation of international real estate portfolios. Since, if returns are driven by a continental factor, investors should look for diversification opportunities outside their own continent. Over the last decade listed real estate markets have matured internationally, and many of the market dynamics reported in the past have changed. This paper will add to the existing literature by explicitly considering potential time variations in international correlations. In order to assess the effect of market maturity, liquidity and institutional involvement an international scope grants possibilities for new and valuable insights in the matter. Therefore we will study monthly total returns of all real estate shares traded on the twenty most prominent financial markets in the world. We analyze a period that dates back to 1985 and we will explicitly focus on variations over time. For this project we will employ the unique GPR General Quoted Database which offers us complete market coverage, which is free of survivorship bias.