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
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
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: 1981-2006 Paris: Return information for eleven submarkets Time period covered: 1998-2006 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
London Office Total Return Statistics 1981-2006 Heydenreich, Kohlert, Oehler (3) Results: Descriptives London Office Total Return Statistics 1981-2006 Paris Office Total Return Statistics 1998-2006 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
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 5
Heydenreich, Kohlert, Oehler (3) Results: Paris 1998-2006 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
Combining the submarkets of both cities lead to much better risk Heydenreich, Kohlert, Oehler (3) Results: London / Paris 1998-2006 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
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
Thank you for your comments! Heydenreich, Kohlert, Oehler 9 London / Paris: Diversification Benefits through Intracity Diversification 9 9
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London Office Total Return Statistics 1981-2006 Heydenreich, Kohlert, Oehler Return Information London Office Total Return Statistics 1981-2006 London / Paris: Diversification Benefits through Intracity Diversification 11 11
Paris Office Total Return Statistics 1998-2006 Heydenreich, Kohlert, Oehler Return Information Paris Office Total Return Statistics 1998-2006 London / Paris: Diversification Benefits through Intracity Diversification 12 12
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), 1, 2, 7-10, 12, 15-17 and 19 SW 1 (South West) and W 1 (West) London / Paris: Diversification Benefits through Intracity Diversification 13 13
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
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 London / Paris: Diversification Benefits through Intracity Diversification 15 15
London submarkets – Correlation coefficients (1981-2006) Heydenreich, Kohlert, Oehler Correlation Analysis London submarkets – Correlation coefficients (1981-2006) London / Paris: Diversification Benefits through Intracity Diversification
London – Percentage allocation of submarkets Heydenreich, Kohlert, Oehler Efficient frontier London – Percentage allocation of submarkets London / Paris: Diversification Benefits through Intracity Diversification 17 17
Paris submarkets – Correlation coefficients (1998-2006) Heydenreich, Kohlert, Oehler Correlation Analysis Paris submarkets – Correlation coefficients (1998-2006) London / Paris: Diversification Benefits through Intracity Diversification 18 18
Paris – Percentage allocation of submarkets Heydenreich, Kohlert, Oehler Efficient frontier Paris – Percentage allocation of submarkets London / Paris: Diversification Benefits through Intracity Diversification 19 19
London / Paris Paris submarkets – Correlation coefficients (1998-2006) Heydenreich, Kohlert, Oehler Correlation Analysis London / Paris Paris submarkets – Correlation coefficients (1998-2006) ØρL,P = 0,72 20 London / Paris: Diversification Benefits through Intracity Diversification 20
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