London Paris Diversification Benefits through Intracity Diversification Florian
London / Paris: Diversification Benefits through Intracity Diversification Florian Heydenreich, Daniel Kohlert and Andreas Oehler Bamberg University, Germany Chair of Finance ERES conference 2009 24 th – 27 th of July Stockholm
Heydenreich, Kohlert, Oehler (1) Introduction Researchers have made great efforts to refine real estate portfolio diversification strategies under risk return considerations. Within geographic diversification, risk reduction can be achieved through different strategies. (e. g. international, regional) Only few studies have examined benefits of intracity diversification. Real estate markets are local markets and assets in local submarkets of a city may behave differently than the city in which they exist. We examine intracity diversification opportunities for two of the most important real estate investment markets in Europe, London and Paris. London / Paris: Diversification Benefits through Intracity Diversification 2
Heydenreich, Kohlert, Oehler (2) Data and Methodology Data IPD Investmentefficiency Mean variance Property theory Databank is used to analyze risk return Annual Total opportunities optimization return data for through office buildings intracity diversification for both cities. London: Return information for eight central postcode districts Time period covered: 1981 2006 Paris: Return information for eleven submarkets Time period covered: 1998 2006 London / Paris: Diversification Benefits through Intracity Diversification 3
Heydenreich, Kohlert, Oehler (3) Results: Descriptives London Office Total Return Statistics 1981 2006 Øρ = 0, 92, ص = 11, 30%, Øσ= 13, 36% Paris Office Total Return Statistics 1998 2006 Øρ = 0, 82, ص = 12, 10%, Øσ = 6, 60% London / Paris: Diversification Benefits through Intracity Diversification 4
Heydenreich, Kohlert, Oehler (3) Results: London 1981 -2006 Efficient frontier: Risk return characteristics can be improved by intracity diversification. London / Paris: Diversification Benefits through Intracity Diversification 5
Heydenreich, Kohlert, Oehler (3) Results: Paris 1998 -2006 Strong diversification Efficient frontier: benefits through optimally weighting the districts. Benefits of well structured diversification strategy become more visible. London / Paris: Diversification Benefits through Intracity Diversification 6
Heydenreich, Kohlert, Oehler (3) Results: London / Paris 1998 -2006 Combining Efficient frontier: the submarkets of both cities lead to much better risk adjusted returns than the one city strategies. London / Paris: Diversification Benefits through Intracity Diversification 7
Heydenreich, Kohlert, Oehler (4) Conclusion Intracity diversification can reduce unsystematic risk. Portfolio managers, concentrating their investments in fewer markets, benefit from reduced information and management costs. Further research on the topic of intracity diversification: Other time periods, cities and property types should be covered, as all three variables may have important influences on the obtainable diversification benefits. London / Paris: Diversification Benefits through Intracity Diversification 8
Heydenreich, Kohlert, Oehler Thank you for your comments! London / Paris: Diversification Benefits through Intracity Diversification 9
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Heydenreich, Kohlert, Oehler Return Information London Office Total Return Statistics 1981 2006 London / Paris: Diversification Benefits through Intracity Diversification 11
Heydenreich, Kohlert, Oehler Return Information Paris Office Total Return Statistics 1998 2006 London / Paris: Diversification Benefits through Intracity Diversification 12
Heydenreich, Kohlert, Oehler London and Paris Submarket Overview London Postcode Areas & Districts of Paris Data available for the following submarkets: EC 1 4 (East Central), WC 1 2 (West Central), SW 1 (South West) and W 1 (West) London / Paris: Diversification Benefits through Intracity Diversification 1, 2, 7 10, 12, 15 17 and 19 13
Heydenreich, Kohlert, Oehler London submarkets London postal Relevant London areas postal districts Clerkenwell, East EC 1 London Finsbury, (E) Barbican area East 2 Central EC North eastern. London area of(EC) The City North EC South 3 West eastern London area of (NW) The City South EC Western 4 West area London of The(SW) City West 1 London (W) SW Westminster, Belgravia, Pimlico, Victoria area North End, West London including (N) Mayfair, Soho and south Marylebone South W Bloomsbury 1 East London & Gray's (SE) Inn area West Central Holborn / Strand London / Covent (WC)Garden area WC 1 WC 2 London / Paris: Diversification Benefits through Intracity Diversification 14
Heydenreich, Kohlert, Oehler Paris submarkets Submarket Name 1 Louvre 11 Popincourt 2 Bourse 12 Reuilly 3 Temple 13 Gobelins 4 Hôtel de Ville 14 Observatoire 5 Panthéon 15 Vaugirard 6 Luxembourg 16 Passy 7 Palais-Bourbon 17 Batignolles-Monceau 8 Élysée 18 Butte Montmartre 9 Opéra 19 Buttes-Chaumont 10 Enclos-St-Laurent London / Paris: Diversification Benefits through Intracity Diversification 20 Ménilmontant 15
Heydenreich, Kohlert, Oehler Correlation Analysis London submarkets – Correlation coefficients (1981 2006) London / Paris: Diversification Benefits through Intracity Diversification 16
Heydenreich, Kohlert, Oehler Efficient frontier London – Percentage allocation of submarkets London / Paris: Diversification Benefits through Intracity Diversification 17
Heydenreich, Kohlert, Oehler Correlation Analysis Paris submarkets – Correlation coefficients (1998 2006) London / Paris: Diversification Benefits through Intracity Diversification 18
Heydenreich, Kohlert, Oehler Efficient frontier Paris – Percentage allocation of submarkets London / Paris: Diversification Benefits through Intracity Diversification 19
Heydenreich, Kohlert, Oehler Correlation Analysis ØρL, P = 0, 72 London / Paris submarkets – Correlation coefficients (1998 2006) London / Paris: Diversification Benefits through Intracity Diversification 20
Heydenreich, Kohlert, Oehler Efficient frontier London / Paris Percentage allocation of submarkets London / Paris: Diversification Benefits through Intracity Diversification 21
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