REAL ESTATE INVESTMENT DIVERSIFICATION

Abstract

It is common practice for investors and their advisors to evaluate a real estate investment based on how 'it feels right'. Although such an approach is traditional, it can no longer be effective in coping with the complexities and problems associated with modern real estate investment. The Modern Portfolio Theory is based on a diversification strategy. This approach increases stability and reduces the variance, thereby reducing risk. Na‹ve diversification reduces variance also, but not as well as planned diversification. This study examines the effectiveness of sectoral and locational diversification using quarterly price index from the Urban Redevelopment Authority of Singapore. The findings show that sectoral diversification gives rise to a better risk-return trade-off than locational diversification. Sectoral diversification is also deemed to be the preferred way of diversification for real estate investors. This is further affirmed by the findings from the analysis of the property portfolio of the various developer firms in Singapore.