The impact of market risk on property portfolio risk reduction

Peter Byrne (Department of Land Management and Development, The University of Reading, Reading, UK)
Stephen Lee (Department of Land Management and Development, The University of Reading, Reading, UK)

Journal of Property Investment & Finance

ISSN: 1463-578X

Publication date: 1 December 2000

Abstract

This paper investigates the extent to which risk reduction can be achieved within the UK property market in high and low Beta portfolios. This issue is examined by making simulations of property portfolios of increasing size using the largest sample (392) of actual property returns that is currently available, over the period 1981 to 1996. In particular it is shown that the achievable level of risk reduction is negatively related to the level of market risk of the individual assets. Thus portfolios based on individually high market risk assets require larger numbers of properties to achieve the same level of risk reduction than low Beta risk portfolios. In addition it is shown that the number of properties needed to “track” the market is prohibitively large and unlikely to be achievable for all but the very largest UK property funds. The practical implications of this are that UK property fund performance is likely to be mainly driven by stock selection, even for the largest funds. For those fund managers who wish to track the market the costs in terms of portfolio value seem prohibitively expensive. On this basis, no UK property fund, even the largest, would follow a passive investment policy.

Keywords

Citation

Byrne, P. and Lee, S. (2000), "The impact of market risk on property portfolio risk reduction", Journal of Property Investment & Finance, Vol. 18 No. 6, pp. 613-626. https://doi.org/10.1108/14635780010357578

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MCB UP Ltd

Copyright © 2000, MCB UP Limited

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