Real Estate Portfolio Diversification by Sources of Return

Abstract

Executive Summary. The basis of the superior performance of the contrarian strategy is a lively debate in the finance literature. In relation to real property, the contrarian strategy implies that properties with high running yield (i.e., value properties) could outperform properties with low running yield (i.e., growth properties). Williams (1995) was the first to hypothesize and demonstrate that “the greater the relative balance of return (percentage) from operating and reversion, the more diversified the portfolio, and thus the better the portfolio performance.” This study modified the model to conform to the Markowitz routine, and found that the association between the cash flow concentration level and the portfolio performance index, and between the diversification index and the portfolio performance index was stronger than depicted by Williams. This implies that diversification by sources of return could improve real estate portfolio performance.