PROPERTY PORTFOLIO ANALYSIS

Abstract

Investors have long since recognised the necessity and wisdom of diversification. Until recently, diversification has been randomly carried out based on hunches, premonitions and subjective judgement. Security portfolio analysis has, since 1952, been refined. Modern portfolio theory, viz-a-viz the portfolio theory by Markowitz and the Capital Asset Pricing Model, injected objectivity and sophistication into portfolio analysis. Today, Markowtiz's theory and the Capital Asset Pricing Model are widely accepted. Property investment analysis, on the other hand, has been rather slow to adopt the portfolio approach. The recent emergence of multi-million property companies such as the U.S. Real Estate Investment Trusts (REITs) and the U.K. pension funds has, however, kindled interest and provided the impetus for research into property portfolio analysis. The immense size of capital commitment involved will continually demand greater objectivity and rationality in portfolio policies. As the modern portfolio theory has been firmly established, it is not surprising that academics in the property circles have adapted many of its concepts. This study will attempt, therefore, to examine the implications of the modern portfolio theory for property investments, and in so doing, highlight its deficiencies. The real estate profession should constantly search for more logical, systematic, objective and rational approaches towards analysis of any sort. It is hoped that through this dissertation, a better understanding of the principles of portfolio analysis can be acquired.