IMPACTS OF GEOGRAPHICAL DIVERSIFICATION ON THE RETURN AND VALUE OF REAL ESTATE INVESTMENT TRUSTS (REITS)

Abstract

With the increase of competitiveness in US equity Real Estate Investment Trusts (REITs) market, there has been a very marked and noticeable trend for REITs to diversify their asset portfolios across geographic regions or property types. This dissertation aims to investigate whether geographically diversified REITs offer favourable return and risk than concentrated REITs. This is done by examining the data from US REITs in year 2009 using NCREIF sub-region scheme. To provide a more insightful understanding on the effect of geographical diversification on REITs’ return, this dissertation employs the accounting based, market based and firm value based measures of return. The findings of this dissertation are inconsistent to the modern portfolio theory that diversification helps to mitigate portfolio risk. REITs diversifying across different regions are found to be more risky. In addition, the regression analyses show that none of the REITs’ returns are significantly influenced by the degree of geographical diversification. Therefore, this dissertation proposes that diversified REITs are not compensated for greater risk with higher return. It is also observed that REITs that diversifying across geographic regions are larger in size and tend to invest in only one property sector. On the other hand, REITs that concentrating their asset holdings in certain market regions is more likely to invest their portfolio across different property sectors.