Risk reduction and real estate portfolio size

Abstract

There is remarkably little empirical evidence of the advantages of increased size on risk levels in real estate portfolios based on actual portfolios. This paper improves this by examining the portfolio risk of a large sample of actual real estate data in the UK over the period from 1981 to 1996. The results show that real estate portfolios of larger sizes tend, on average, to have lower risks than smaller sized portfolios and, more importantly, that portfolios with only a few assets can have very high or very low risk. For fund managers to be confident that their portfolio will have a risk level like the average, they need to hold portfolios of a considerably greater size than they might expect, or can sensibly acquire. Previous studies suggesting that only 20-40 properties are needed to reduce the risk of a property portfolio down to the market level are a significant underestimate. The actual figure is likely to be 400-500 properties, well above that of even the largest fund in the UK. Size alone does not necessarily lead to a reduction in portfolio risk. Other factors are of greater importance. Copyright © 2001 John Wiley & Sons, Ltd.

Portfolio Size and Diversification Effect in Lithuanian Stock Exchange Market

“…Sharpe et al, (1997) suggest that 30 stocks is the "magic" number 1. According to Byrne and Lee (2000) the growth of the size of portfolio has a direct impact on its risk. Studies prove that the risk of naive portfolio strongly reduces when including 20-40 assets.…”

The impact of portfolio size on the variability of the terminal wealth of real estate funds

“…Indeed results based on actual property fund portfolio data confirm this. The work of Cullen (1991), Morrell (1993Morrell ( , 1997 and Byrne and Lee (2001) all suggest that the actual number of properties needed to reduce risk down to an acceptable level within a portfolio is more likely to be in the hundreds than the twenties suggested by previous work.…”

How many leases are enough to diversify a portfolio of multi-let industrial properties?

“…Low correlation between assets allowed rapid risk reduction but because the market accounted for only a small part of the return for each individual asset only very large portfolios could hope to achieve high degrees of diversification. Similarly, Cullen (1991) and Byrne and Lee (2001) concluded that four to five hundred would be needed to achieve a satisfactory level of diversification. In a similar vein, Devaney and Lee (2005) study the benefits of increasing the number of properties held and demonstrate that downside risk is diminished as portfolio size increases.…”

“…Whether these types of strategies are sufficient to achieve a significant level of diversification is a moot point as the academic literature suggests that the number of assets required is required is much larger than is held by most institutional portfolios (Brown 1988, Cullen 1991, Byrne and Lee 2001, Callender et al 2007.…”