1. London / Paris: Diversification Benefits through Intracity Diversification
Florian Heydenreich, Daniel Kohlert and Andreas Oehler Bamberg University, Germany
Chair of Finance
ERES conference 2009
24th – 27th of July
Stockholm

2. Researchers have made great efforts to refine real estate portfolio
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, national, 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

3. IPD Investment Property Databank
Heydenreich, Kohlert, Oehler
(2) Data and Methodology
Data
IPD Investment Property Databank
Annual Total return data for office buildings
London: Return information for eight central postcode districts
Time period covered:
Paris: Return information for eleven submarkets
Time period covered:
Methodology
Mean-variance efficiency theory is used to analyze risk-return
optimization opportunities through intracity diversification for both cities.
London / Paris: Diversification Benefits through Intracity Diversification 3 3

4. London Office Total Return Statistics 1981-2006
Heydenreich, Kohlert, Oehler
(3) Results: Descriptives
London Office Total Return Statistics
Paris Office Total Return Statistics
Øρ = 0,92, ص = 11,30%, Øσ= 13,36%
Øρ = 0,82, ص = 12,10%, Øσ = 6,60%
London / Paris: Diversification Benefits through Intracity Diversification 4 4

5. Heydenreich, Kohlert, Oehler
(3) Results: London
Efficient frontier:
Risk-return characteristics can be improved by intracity diversification.
London / Paris: Diversification Benefits through Intracity Diversification 5 5

6. Heydenreich, Kohlert, Oehler
(3) Results: Paris
Efficient frontier:
Strong diversification benefits through optimally weighting the districts.
Benefits of well structured diversification strategy become more visible.
London / Paris: Diversification Benefits through Intracity Diversification 6 6

7. Combining the submarkets of both cities lead to much better risk
Heydenreich, Kohlert, Oehler
(3) Results: London / Paris
Efficient frontier:
Combining 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 7

8. Intracity diversification can reduce unsystematic risk.
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 8

9. Thank you for your comments! Heydenreich, Kohlert, Oehler 9
London / Paris: Diversification Benefits through Intracity Diversification 9 9

10. References Heydenreich, Kohlert, Oehler 10
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London / Paris: Diversification Benefits through Intracity Diversification 10 10

11. London Office Total Return Statistics 1981-2006
Heydenreich, Kohlert, Oehler
Return Information
London Office Total Return Statistics
London / Paris: Diversification Benefits through Intracity Diversification 11 11

12. Paris Office Total Return Statistics 1998-2006
Heydenreich, Kohlert, Oehler
Return Information
Paris Office Total Return Statistics
London / Paris: Diversification Benefits through Intracity Diversification 12 12

13. London Postcode Areas & Districts Districts of Paris
Heydenreich, Kohlert, Oehler
London and Paris Submarket Overview
London Postcode Areas & Districts Districts of Paris
Data available for the following submarkets:
EC 1-4 (East Central), WC 1-2 (West Central), , 2, 7-10, 12, and 19
SW 1 (South West) and W 1 (West)
London / Paris: Diversification Benefits through Intracity Diversification 13 13

14. London submarkets London postal areas East London (E)
Heydenreich, Kohlert, Oehler
London submarkets
London postal areas
East London (E)
East Central London (EC)
North West London (NW)
South West London (SW)
West London (W)
North London (N)
South East London (SE)
West Central London (WC)
Relevant London postal districts
EC 1
EC 2
EC 3
EC 4
SW 1
W 1
WC 1
WC 2
Clerkenwell, Finsbury, Barbican area
North eastern area of The City
South eastern area of The City
Western area of The City
Westminster, Belgravia, Pimlico, Victoria area
West End, including Mayfair, Soho and south Marylebone
Bloomsbury & Gray's Inn area
Holborn / Strand / Covent Garden area
London / Paris: Diversification Benefits through Intracity Diversification 14 14

15. Paris submarkets Submarket Name 1 Louvre 11 Popincourt 2 Bourse 12
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 20
Ménilmontant
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16. London submarkets – Correlation coefficients (1981-2006)
Heydenreich, Kohlert, Oehler
Correlation Analysis
London submarkets – Correlation coefficients ( )
London / Paris: Diversification Benefits through Intracity Diversification

17. London – Percentage allocation of submarkets
Heydenreich, Kohlert, Oehler
Efficient frontier
London – Percentage allocation of submarkets
London / Paris: Diversification Benefits through Intracity Diversification 17 17

18. Paris submarkets – Correlation coefficients (1998-2006)
Heydenreich, Kohlert, Oehler
Correlation Analysis
Paris submarkets – Correlation coefficients ( )
London / Paris: Diversification Benefits through Intracity Diversification 18 18

19. Paris – Percentage allocation of submarkets
Heydenreich, Kohlert, Oehler
Efficient frontier
Paris – Percentage allocation of submarkets
London / Paris: Diversification Benefits through Intracity Diversification 19 19

20. London / Paris Paris submarkets – Correlation coefficients (1998-2006)
Heydenreich, Kohlert, Oehler
Correlation Analysis
London / Paris Paris submarkets – Correlation coefficients ( )
ØρL,P = 0,72 20
London / Paris: Diversification Benefits through Intracity Diversification 20

21. London / Paris Percentage allocation of submarkets
Heydenreich, Kohlert, Oehler
Efficient frontier
London / Paris Percentage allocation of submarkets
London / Paris: Diversification Benefits through Intracity Diversification 21 21