Global Property Market Diversification

Authors: John G Gallo Ying Zhang

Publish Date: 2009/04/14

Volume: 41, Issue: 4, Pages: 458-485

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Abstract

This paper examines global diversification benefits provided by developed property markets over 1992–2007 We employ a cointegration methodology invariant to pairwise correlational instability plaguing MPT approaches to investigate regional and country property market diversification benefits for US domiciled global real estate investors We show theoretically and empirically the cointegration procedure aptly identifies markets integrated by common trends that mitigate diversification potential We show global property markets are interregionally independent but find intraregional market cointegration A portfolio of markets independent of cointegrating relationships performs best during the period but is insufficiently diversified relative to a cointegrated portfolio Independent country markets do account for the bulk of global property diversification gains but cointegrated markets particularly from the North American and Asia Pacific regions retain some diversifying qualities We also show cointegrated markets converge toward benchmark characteristics reducing their attraction as portfolio candidatesThe authors are indebted to an anonymous referee for constructive insight and comments We also thank William Crowder Andrew Hansz Darren Hayunga Larry Lockwood Peggy Swanson and seminar participants at the 2008 Conference of the Financial Management Association for helpful discussions

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