CURRENCY RISK AND INTERNATIONAL REAL ESTATE DIVERSIFICATION : A COMPARISON OF DEVELOPED AND DEVELOPING ECONOMICS

Abstract

In recent years, a great deal of interest has been generated in emerging capital markets, especially among institutional investors such as pension funds and insurance companies. Barry and Lockwood (1995) highlighted the potential benefits of diversification in emerging capital markets for investors holding U.S. only or industrialised country portfolios. However, amidst the rapidly increasing interest in investment opportunities in emerging markets, little is known about real estate as an investment vehicle in those markets. This study uses direct real estate investment data for five developing/emerging countries (Thailand, Indonesia, Malaysia, China and the Philippines) and seven developed countries (Singapore, Japan, Hong Kong, France, Britain, Ireland and New Zealand) to examine the performance of emerging real estate markets against those of developed markets. The results show that the long term performance of a portfolio consisting of emerging economies real estate is superior to a portfolio of developed economies real estate. The findings also show that the developing economies portfolio is more vulnerable to the effects of currency movements in the long run. In addition, another portfolio which contains all twelve countries in the sample (both developed and developing countries) is examined, it is found that this all nations portfolio offers the Singaporean institutional investor a better risk-return trade-off position than the two earlier portfolios.