THE ROLE OF ASIA-PACIFIC REAL ESTATE SECURITIES IN INTERNATIONAL INVESTMENT PORTFOLIOS

Abstract

This research examines the role of Asia-Pacific real estate securities traded in Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Taiwan and Thailand in international investment portfolios. Using risk-adjusted returns, static/rolling correlations and Markowitz portfolio model, the goal is to assess whether Asian real estate securities offer diversification benefits and portfolio enhancement in mixed-asset portfolio. Two mature markets, namely the US and UK are studied to highlight the role of Asian real estate securities in the US/UK investment portfolio. The 10-year period of 1996-2005 and two sub-periods of 1996-2000, 2001-2005 are chosen to assess the stability of correlations during varying market conditions. Results suggest that, apart from Japan, real estate securities in these Asian markets underperform the stock markets on a risk-adjusted basis. The consistent high correlation between real estate securities and shares proves that Asian real estate securities still exhibit patterns common to the wider equity market. Although the low or negative correlations between real estate securities and bonds/cash indicate the diversification potential in a mixed-asset portfolio consisting of shares, bonds, cash and real estate securities, little evidence of risk-reduction and portfolio enhancement is found by including real estate securities into the portfolios. Additionally, the correlation coefficients between the US NAREIT index /UK FTSE real estate index and Asian real estate security indices are still considerably low despite the increasing global capital market integration. However, Asian real estate securities provide least protection during the periods of high market volatility as inflated correlations are observed in many Asian markets. The findings have important implications for strategic asset allocation (SAA) and institutional investments in international real estate markets.