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Changes in the Relative Importance of Sector and Regional Factors: 1987-2002

Author

Listed:
  • Steven Devaney

    (Department of Real Estate & Planning, University of Reading Business School)

  • Stephen Lee

    (Department of Real Estate & Planning, University of Reading Business School)

Abstract

A stylised fact in the real estate portfolio diversification literature is that sector (property-type) effects are relatively more important than regional (geographical) factors in determining property returns. Thus, for those portfolio managers who follow a top-down approach to portfolio management, they should first choose in which sectors to invest and then select the best properties in each market. However, the question arises as to whether the dominance of the sector effects relative to regional effects is constant. If not property fund managers will need to take account of regional effects in developing their portfolio strategy. We find the results show that the sector-specific factors dominate the regional-specific factors for the vast majority of the time. Nonetheless, there are periods when the regional factors are of equal or greater importance than the sector effects. In particular, the sector effects tend to dominate during volatile periods of the real estate cycle; however, during calmer periods the sector and regional effects are of equal importance. These findings suggest that the sector effects are still the most important aspect in the development of an active portfolio strategy.

Suggested Citation

  • Steven Devaney & Stephen Lee, 2003. "Changes in the Relative Importance of Sector and Regional Factors: 1987-2002," Real Estate & Planning Working Papers rep-wp2003-16, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:repxwp:rep-wp2003-16
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    References listed on IDEAS

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    1. Mark Andrew & Steven Devaney & Stephen Lee, 2003. "Another Look at the Relative Importance of Sectors and Regions in Determining Property Returns," Real Estate & Planning Working Papers rep-wp2003-14, Henley Business School, University of Reading.
    2. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
    3. Kennedy, Peter, 1986. "Interpreting Dummy Variables," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 174-175, February.
    4. Griffin, John M. & Andrew Karolyi, G., 1998. "Another look at the role of the industrial structure of markets for international diversification strategies," Journal of Financial Economics, Elsevier, vol. 50(3), pages 351-373, December.
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