US real estate as target assets for European investors: New empirical evidence of diversification benefits

Cay Oertel (International Real Estate Business School, University of Regensburg, Regensburg, Germany)
Thomas Gütle (US Treuhand, Munich, Germany)
Benjamin Klisa (Deka Immobilien GmbH, Frankfurt, Germany)
Sven Bienert (International Real Estate Business School, University Regensburg, Regensburg, Germany)

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 10 May 2019

Issue publication date: 10 June 2019



The purpose of this paper is to analyze potential diversification benefits of American real estate assets for European investors. Since European real estate yields are compressed due to several reasons, including high market liquidity and low interest rates, investment managers seek opportunities to provide attractive risk-return profiles for investors. Therefore, empirical proof for improvements to risk-return profiles is highly necessary in the outlined market environment.


The empirical study uses a classic mean-variance optimization approach. In order to isolate potential diversification benefits two investment environments are compared: first, an optimization for the European investment horizon is carried out. Subsequently, the same optimization is performed for European and American assets. For both scenarios, risk-return profiles are obtained and compared.


Two major findings can be stated: first, higher correlations between European and American markets can be observed for the present data in comparison to older studies. Second, the mean-variance optimization of solely European and then mixed European-American portfolios show improvements in risk-return profiles for the latter. Thus, diversification benefits of American properties for European real estate investors can be confirmed.

Practical implications

The empirical study reveals diversification benefits for European investors. Thus, the asset allocation of European investors could be affected by allocating capital toward the USA in order to improve risk-return profiles.


The value of the paper is a precise analysis of two markets, namely Europe as well as the US. Thus, the paper isolates the practical implications for European investors, who are trying to improve risk-returns profile by allocating capital toward the USA.



Oertel, C., Gütle, T., Klisa, B. and Bienert, S. (2019), "US real estate as target assets for European investors: New empirical evidence of diversification benefits", Journal of Property Investment & Finance, Vol. 37 No. 4, pp. 398-404.



Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited


The diversification of real estate portfolios is a central topic in academic research as well as for market participants. Real estate portfolios can typically be diversified by property types, region, etc. Both, theoretical drivers and empirical studies, provide evidence of improved risk-return profiles due to geographic diversification. Since European real estate returns are heavily compressed, capital allocation seeks new investment opportunities to provide attractive risk-return profiles.

Especially traditionally risk-averse investors such as pension funds, insurance companies and open-ended mutual funds show considerable interest in risk minimization in order to decrease the risk exposure of their portfolios. Diversification is a classic, but by no means outdated risk-management tool for improving risk-adjusted returns.

Literature review and hypothesis derivation

Portfolio theory and regional diversification are classic disciplines within the broader field of economic, as well as in the real-estate-related literature (Lee and Stevenson, 2005). The main aim is to improve efficient risk-return profiles for different investment horizons. Thus, investors expect higher risk-adjusted returns after enlarging their investment environment, in comparison to a narrower scale. The described calculus is also considered as one of the main drivers for an increase in international capital flows into real estate (Fuerst et al., 2015).

International diversification is also more beneficial than national diversification across property types (Beckers et al., 1996; Heston and Rouwenhorst, 1994). Thus, investors may achieve higher risk-adjusted returns through international allocation. In this context, Eichholtz et al. (1993), Goetzmann and Wachter (1995) and Eichholtz et al. (1998) name “continental factors” as the main drivers of diversification benefits from geographic diversification. The authors state that these highly country-specific factors form independent and stable macroeconomic environments. Thus, real estate investors diversify their portfolios across such underlying continental factors.

Nonetheless, Lizieri and Pain (2014) point out that the national (or even continental) level is not sufficient to evaluate diversification potential. By contrast, the authors state that returns are dependent on a city level. The authors see international connections between cities due to economic interaction, industry and tourism (e.g. New York and London are heavily connected). Thus, investors are advised to diversify their portfolios across different city types, which should correlate as negatively as possible in order to maximize diversification benefits.

Conversely, spillover effects between markets may minimize diversification potential. Diebold and Yilmaz (2012), Liow (2016) as well as Liow and Angela (2017) show a strong dependency between European and US macroeconomic and accordingly real-estate-related fundamental values. These spillovers may intensify international synchronization and thus increase the correlation of economic and real estate developments. A current study from the IMF (2018) underlines the decreasing diversification potential through an increase in international economic linkages. These linkages also include the real estate sector and its integration into global capital markets, which triggers an increased positive correlation.

Taking all the above mentioned aspects into account, the central hypothesis for the empirical study is that US real estate offers benefits for the risk-return profile of European real estate investors. Additionally and in comparison to earlier studies, the extent of diversification potential will be assessed. Accordingly, the following working hypotheses can be stated:


Investment in US properties (geographical diversification) improves the risk-return profile for European real estate investors.


The potentials for the geographical diversification decrease due to an increase in global integration.

Data and descriptive statistics

In order to test H1 and thus analyze potential diversification benefits, total returns for the following markets in Europe and the USA were obtained:

  • US office;

  • US industrial;

  • US retail;

  • US hotel;

  • US apartment;

  • Germany Commercial (German “Top 7” cities, including Hamburg, Berlin, Frankfurt, Stuttgart, Munich, Dusseldorf, Cologne);

  • UK office;

  • UK retail;

  • UK industrial;

  • Netherlands Commercial (Amsterdam);

  • France Commercial (Paris); and

  • Scandinavia Commercial (A-Cities in Denmark, Norway, Sweden and Finland).

The data cover total returns per quarter provided by Real Capital Analytics from Q1/2008 until Q2/2018. Thus, we analyze a total number of 42 observations per time series. The return series was currency adjusted to euros for each period using the adjustment formula of Sirmans and Worzala (2003).

This currency-adjustment method – however – implies entirely free-floating exchange rates. Hence, the calculation represents complete exchange rate exposure. The assumption does not necessarily reflect typical market behavior, especially for risk-adverse investors such as insurance companies or open-ended mutual funds, since these investors usually fully hedge their currency risk[1]. For the free-floating currency-adjusted data, the following descriptive statistics were obtained.

Table I shows that the highest returns on average can be obtained from US Apartment properties, whereas the returns from Dutch commercial properties are conspicuously poor. We also find mixed variance across markets, with relatively high riskiness of UK properties (variance between 0.031 and 0.043 on average). Another descriptive finding is the negative skewness of 11 return series. Only German returns are positively skewed. American returns show heavy negative skewness. A mixed pattern can be found with regard to the kurtosis of the series, since four markets display a negative kurtosis, in comparison to seven markets with positive kurtosis.

Diversification potential – however – is not only subject to the risk-return characteristics of individual assets, but also to their joint behavior. The correlation matrix was calculated accordingly (see Table AI).

In comparison to older studies such as Eichholtz et al. (1998), the obtained correlations yield higher values between European and US returns, ranging from 0.383 to 0.572. These higher values can be interpreted as an increase in global economic synchronization. For investors seeking diversification benefits, these developments are negative since risk minimization in a portfolio optimization framework is a direct function of asset return correlation.

Empirical study and results

Our empirical framework for analyzing diversification benefits is a classic Markowitz portfolio optimization. In order to isolate these benefits, two investment horizons are compared: A European portfolio (“Europe Real Estate,” containing European markets only) and a mixed US-European portfolio (“US/Europe Real Estate,” containing all above mentioned markets). Diversification benefits were indeed found, if the mixed portfolio offered better risk-return profiles than the European one, measured by the Sharpe Ratio. For both investment horizons, a portfolio optimization is conducted. The optimization is subject to the following constraints, in order to establish a realistic investment environment:

  • Minimum portfolio weight per market: 5 percent.

  • Maximum portfolio weight per market: 49 percent.

  • Capital has to be completely invested.

  • No short selling.

A positive difference in risk return was interpreted as hypothesis confirmation. For the described empirical approach, the efficient risk-return profiles were calculated in Figure 1.

As shown in Figure 1, the efficient risk-return profiles of a rational investor differ. The mixed US−European portfolio offers a Sharpe Ratio of 1.11, whereas the European portfolio only shows a Sharpe Ratio of 1.03. Thus, the hypothesis of the present article can be confirmed. That is, the present empirical study indicates that US real estate offers diversification benefits for European investors.

Concluding remarks and further aspects

The central result of the study is empirical proof of diversification benefits offered by US real estate assets for European real estate investors. The portfolio optimization approached revealed risk-return benefits for investors, expressed by a higher Sharpe Ratio of mixed US−European portfolios compared to entirely European portfolios. Thus, the central hypothesis (H1) can be confirmed.

Nonetheless, for portfolio optimization approaches in a real estate context, methodological limitations need to be stressed. Allocation problems due to high capital intensity, transaction costs and asymmetric information are – among others – the most prominent. Alternative approaches have been presented by Byrne and Lee (2011) and also very recently by Leone and Ravishankar (2018).

The present study also indicates smaller diversification benefits than do other studies, which use older data. This decrease is based on a higher correlation of European and US real estate returns in comparison to previous studies. Thus, a higher synchronization of global markets can be observed. This finding is the second and rather delusional sign for investors seeking international diversification benefits. Hence, we also confirm H2. The synchronization of increasingly globalized and synchronized economies and real estate markets in the USA and Europe may, on the other hand, decline if economic connections between Europe and Asia are tightened.

With regard to the direct practical implications, the present study can be interpreted as an empirical proof of benefits for European investors from asset allocation toward the USA. Thus, investors who suffer from current yield compression and potentially unattractive risk-return profiles in Europe may find improvements to their portfolios by extending their investment horizon including the USA.


Portfolio optimization results

Figure 1

Portfolio optimization results

Descriptive statistics of quarterly total returns Q1/2008–Q2/2018

Market US office US industrial US retail US hotel US apartment Germany commercial
Mean 0.082 0.095 0.069 0.090 0.116 0.086
SD 0.031 0.027 0.026 0.037 0.030 0.028
Skewness −1.246 −1.162 −1.110 −1.238 −1.558 0.432
Kurtosis 0.564 1.201 0.421 0.695 1.522 −0.025
Market UK office UK retail UK industrial Netherlands commercial France commercial Scandinavia commercial
Mean 0.082 0.057 0.099 0.022 0.073 0.086
SD 0.031 0.042 0.043 0.032 0.013 0.021
Skewness −1.291 −0.222 −1.495 −0.191 −0.184 −0.184
Kurtosis 0.773 2.673 2.082 −0.583 −0.499 −0.464

Source: Own representation

Correlation matrix of markets

US office US industrial US retail US hotel US apartment UK office UK retail UK industrial Netherlands commercial France commercial Germany commercial Scandinavia commercial
US office 1.000
US industrial 0.884 1.000
US retail 0.909 0.907 1.000
US hotel 0.791 0.772 0.778 1.000
US apartment 0.903 0.840 0.895 0.736 1.000
UK office 0.998 0.884 0.907 0.798 0.899 1.000
UK retail 0.175 0.320 0.388 −0.121 0.333 0.168 1.000
UK industrial 0.490 0.563 0.626 0.206 0.518 0.477 0.712 1.000
Netherlands commercial 0.351 0.421 0.388 0.140 0.384 0.334 0.607 0.686 1.000
France commercial 0.570 0.574 0.691 0.527 0.664 0.560 0.471 0.547 0.416 1.000
Germany commercial 0.451 0.474 0.398 0.467 0.414 0.453 −0.020 0.333 0.469 0.327 1.000
Scandinavia commercial 0.592 0.569 0.631 0.556 0.541 0.593 0.068 0.552 0.374 0.399 0.629 1.000

Source: Own representation



The method was chosen for the sake of simplicity, since the individually targeted risk exposure is highly investor dependent. Relevant research may be conducted on different currency exposure in optimization problems.


Table AI


Beckers, S., Connor, G. and Curds, R. (1996), “National versus global influences on equity returns”, Financial Analysts Journal, Vol. 52 No. 2, pp. 31-49.

Byrne, P. and Lee, S. (2011), “Sector, region or function? A MAD reassessment of real estate diversification in Great Britain”, Journal of Property Investment and Finance, Vol. 29 No. 1, pp. 167-189.

Diebold, F.X. and Yilmaz, K. (2012), “Better to give than to receive predictive directional measurement of volatility spillovers”, International Journal of Forecast, Vol. 28 No. 1, pp. 57-66.

Eichholtz, P., Mahieu, R. and Schotman, P.C. (1993), “Real Estate diversification: by county or by continent?”, Maastricht University working paper, Maastricht.

Eichholtz, P., Huisman, R., Koedijk, K. and Schuin, L. (1998), “Continental factors in international real estate”, Real Estate Economics, Vol. 26 No. 3, pp. 493-509.

Fuerst, F., Milcheva, S. and Baum, A. (2015), “Cross-border capital flows into real estate”, Real Estate Finance, Vol. 31 No. 3, pp. 103-122.

Goetzmann, W.N. and Wachter, S.M. (1995), “The global real estate crash: evidence from an international database”, working paper, Yale University and Zell/Lurie Real Estate Center at Wharton, University of Pennsylvania, Wharton.

Heston, S.L. and Rouwenhorst, K.G. (1994), “Does industrial structure explain the benefits of international diversification?”, Journal of Financial Economics, Vol. 36 No. 1, pp. 53-58.

IMF (2018), “Global financial stability report April 2018: a Bumpy Road Ahead”, International Monetary Fund, Washington, DC.

Lee, S. and Stevenson, S. (2005), “Testing the statistical significance of sector and regional diversification”, Journal of Property Investment and Finance, Vol. 23 No. 5, pp. 39-411.

Leone, V. and Ravishankar, G. (2018), “Frontiers of commercial real estate portfolio performance: are sector-region-efficient diversification strategies a myth or reality?”, Journal of Property Research, Vol. 35 No. 2, pp. 95-116.

Liow, K.H. (2016), “Global financial crisis and cyclical co-movements of Asian financial markets”, Journal of Property Investment and Finance, Vol. 34 No. 5, pp. 465-495.

Liow, K.H. and Angela, S.Y. (2017), “Return and co-movement of public real estate markets during financial crisis – a frequency domain approach”, Journal of Property and Finance, Vol. 35 No. 3, pp. 489-508.

Lizieri, C. and Pain, K. (2014), “International office investment in global cities: the production of financial space and systemic risk”, Regional Studies, Vol. 48 No. 3, pp. 439-455.

Sirmans, S. and Worzala, E. (2003), “International direct real estate investment: a review of the literature”, Urban Studies, Vol. 40 Nos 5/6, pp. 1081-1114.

Corresponding author

Cay Oertel can be contacted at: