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Investment Property Diversification Over Different Economic Phases in New Zealand

Author/s: Zhi Dong, Ningkun Li

Date Published: 1/01/2012

Published in: Volume 18 - 2012 Issue 2 (pages 106 - 128)

Abstract

This study empirically investigates the enhancement of cross-sector diversification for investment properties in a small economy, where there are only a few regional choices. It also examines the distinct effects of optional diversification strategies over different economic phases. The study constructs investment property return indices using a unique listed investment property database in New Zealand, which compares the Sharpe ratio of optional investment portfolios under different diversification strategies. It is found that a portfolio of industrial properties in Auckland is preferable to any other property portfolios over the entire sample period in New Zealand. The findings support a prior strategy to prudently select properties in a major city in this small economy. The findings recommend direct or indirect property investors prioritize the locational choice in a small economy. The findings imply that the best diversification strategy may not be consistent over different economic phases. This study is one of the few to explicitly compare diversification strategies over different economic phases. It also provides additional new insights towards the importance of cross-sector diversification in a small economy.

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Keywords

Economic Phases - Investment Properties - Portfolio Diversification - Small Economy

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