This paper aims to focus on three points of the theory about property investment risks: the management risk is not taken into account; the assumed regularity of the damping of the specific risks with an increase in the number of investments; and the assumption that the market risk is constant.
The analyses performed are based on an investment portfolio in the Dutch office market with 14 properties (fictive).
There are three risk component within the risk profile instead of the named two, namely: specific risk, depends on special individual factors of the investments; management risk, reflects the span of control problem of the organization of the investor; and systematic risk, depends on distinguishing local levels. The calculations do show the effect of diversification, but not in all cases. It depends on the order in which assets associated with different risks are added. Moreover, management and systematic risk work cumulative and opposed to the difersifying power of the specific risk because both increase with increasing portfolio size.
The market risk and the management risk can only be specified as subjective estimates, since they cannot be measured by the conventional standard‐deviation method.
The investor will have to learn to live with the fact that you never can tell.
This analysis shows that the theory derived for the financial market is only partially applicable, and that real estate investments need to be assessed on their own merits.
Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited