The Relative Importance of Property Type and Regional Factors in Real Estate Returns

Abstract

Executive Summary. This article presents an elegant and simple approach to the decomposition of property type and regional influences on property returns, and thus provides a quantitative framework for analyzing the relative impact of these two diversification categories to real estate portfolio selection. Using data on retail, office and industrial properties spread across 326 real estate locations in the United Kingdom, over the period 1981 to 1995, the results show that the performance of real estate is largely property type-driven, a result in line with previous work. This implies that the property type composition of the real estate fund should be the first level of analysis in constructing and managing the real estate portfolio. As a consequence, real estate fund managers need to pay more attention to the property type allocation of their portfolios than to the regional spread.

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