Distance and diversification

Abstract

Purpose

The purpose of this paper is to examine whether geographical distance or economic distance offers greater diversification benefits in the UK office market.

Design/methodology/approach

The real estate investment data for this study come from the Investment Property Databank analysis “UK Quarterly Key Centres Q2 2015”. The author measures the geographical distance between the City of London and 27 local authorities (LAs) by road distance. The author used the market size and employment structure of the LAs relative to the City of London to calculate economic distance.

Findings

The results show that LAs that are classified on their economic distance show significant negative office rental growth correlations with the City of London. In contrast, geographical distance shows no relationship. Results are consistent for the overall sample period and for various periods.

Practical implications

Spatial diversity is a fundamental tenet of real estate portfolio management and the results here show that it is better to diversify by across office markets in the UK using the economic attributes of LAs rather than the physical distance between locations.

Originality/value

This is one of only two papers to explicitly examine whether economic distance or geographical distance leads to significantly lower rental growth coefficients between locations in office markets and the first in the UK.

Citation

Lee, S. (2016), "Distance and diversification", Journal of European Real Estate Research, Vol. 9 No. 2, pp. 183-192. https://doi.org/10.1108/JERER-02-2016-0010