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Abstract
The purpose of this paper is to examine the benefits of international diversification in residential real estate markets during various market conditions from 1999 through 2018. Most previous studies used real estate investment trusts (REITs) indexes to proxy for real estate returns, while our research is focused on residential real estate indexes provided by Dallas Federal Reserve Bank. In addition, we expand our study to 23 countries, while previous research was limited to 5 to 10 countries. We find lower correlation between US stocks and global real estate indexes. Further analysis indicates that adding international real estate to a US stock portfolio is beneficial in reducing portfolio risk, and this diversification benefit is consistent over time. Our results will assist portfolio managers and long-term investors in keeping a consistent return at a lower risk.
Notes
1 Internally means that an organization makes decisions to buy and sell real estate within that organization.
2 Citations for regulations of all these countries are provided in the footnotes for table 1.
3 Indicating some efficient portfolios consist of US stock and US real estate indexes, but there are other combinations in global real estate indexes, which provide better diversification to a US stock investor in terms of higher return and lower risk.
4 These results also have implications for all international investors because our findings are consistent even if we remove the 10% restriction in US stock market.