The relationship between size, diversification and risk

Property portfolio diversification takes many forms, most of which can be associated with asset size. In other words larger property portfolios are assumed to have greater diversification potential than small portfolios. In addition, since greater diversification is generally associated with lower risk it is assumed that larger property portfolios will also have reduced return variability compared with smaller portfolios. If large property portfolios can simply be regarded as scaled-up, better-diversified versions of small property portfolios, then the greater a portfolio’s asset size, the lower its risk. This suggests a negative relationship between asset size and risk. However, if large property portfolios are not simply scaled-up versions of small portfolios, the relationship between asset size and risk may be unclear. For instance, if large portfolios hold riskier assets or pursue more volatile investment strategies, it may be that a positive relationship between asset size and risk would be observed, even if large property portfolios are more diversified. This paper tests the empirical relationship between property portfolio size, diversification and risk, in Institutional portfolios in the UK, during the period from 1989 to 1999 to determine which of these two characterisations is more appropriate.

Housing and property restitution and IDP return in Kosovo

The establishment of the Housing and Property Directorate (HPD) and Claims Commission (HPCC) in Kosovo has reflected an increasing focus internationally on the post-conflict restitution of housing and property rights. In approximately three years of full-scale operation, the institutions have managed to make a property rights determination on almost all of the approximate 30,000 contested residential properties. As such, HPD and HPCC are being looked to by many in other post-conflict areas as an example of how to proceed. While the efficiency of the organizations is commendable, one of the key original goals - the return of displaced persons to their homes of origin - has to a large degree been left aside. The paper focuses on two distinct failures of the international community with respect to the functioning of HPD/HPCC and its possible effect on returns: a failure of coordination between HPD/HPCC and other organizations working on returns, and the isolation of residential property rights determinations from other aspects of building a property rights-respecting culture in Kosovo.

Perspectives on the role of UK planning in land and property markets

There is a popular view that land use planning regulations (‘planning’) is hostile to both development and the development industry. Part of the reason for the prominence of this view is the homogenising of the notion of ‘planning’ and its reduction to development control. This paper argues that panning controls in the UK are far more sophisticated and, drawing upon empirical evidence of key property interests proposes a more complex and nuanced view of planning controls that, in large part, has the support of the developers and others.

Internal rents and corporate property management: a study into the use of internal rents in UK corporate organisations

Research in the late 1980s showed that in many corporate real estates users were not fully aware of the full extent of their property holdings. In many cases, not only was the value of the holdings unknown, but there was uncertainty over the actual extent of ownership within the portfolio. This resulted in a large number of corporate occupiers reviewing their property holdings during the 1990s, initially to create a definitive asset register, but also to benefit from an more efficient use of space. Good management of corporately owned property assets is of equal importance as the management of other principal resources within the company. A comprehensive asset register can be seen as the first step towards a rational property audit. For the effective, efficient and economic delivery of services, it is vital that all property holdings are utilised to the best advantage. This requires that the property provider and the property user are both fully conversant with the value of the property holding and that an asset/internal rent/charge is made accordingly. The advantages of internal rent charging are twofold. Firstly, it requires the occupying department to “contribute” an amount to the business equivalent to the open market rental value of the space that it occupies. This prevents the treating of space as a free good and, as individual profit centres, each department will then rationalise its holdings to minimise its costs. The second advantage is from a strategic viewpoint. By charging an asset rent, the holding department can identify the performance of its real estate holdings. This can then be compared to an internal or external benchmark to help determine whether the company has adopted the most efficient tenure pattern for its properties. This paper investigates the use of internal rents by UK-based corporate businesses and explains internal rents as a form of transfer pricing in the context of management and responsibility accounting. The research finds that the majority of charging organisations introduced internal rents primarily to help calculate true profits at the business unit level. However, less than 10% of the charging organisations introduced internal rents primarily to capture the return on assets within the business. There was also a sizeable element of the market who had no plans to introduce internal rents. Here, it appears that, despite academic and professional views that internal rents are beneficial in improving the efficient use of property, opinion at the business and operational level has not universally accepted this proposition.

Risk reduction and diversification in UK commercial property portfolios

The issue of diversification in direct real estate investment portfolios has been widely studied in academic and practitioner literature. Most work, however, has been done using either partially aggregated data or data for small samples of individual properties. This paper reports results from tests of both risk reduction and diversification that use the records of 10,000+ UK properties tracked by Investment Property Databank. It provides, for the first time, robust estimates of the diversification gains attainable given the returns, risks and cross‐correlations across the individual properties available to fund managers. The results quantify the number of assets and amount of money needed to construct both ‘balanced’ and ‘specialist’ property portfolios by direct investment. Target numbers will vary according to the objectives of investors and the degree to which tracking error is tolerated. The top‐level results are consistent with previous work, showing that a large measure of risk reduction can be achieved with portfolios of 30–50 properties, but full diversification of specific risk can only be achieved in very large portfolios. However, the paper extends previous work by demonstrating on a single, large dataset the implications of different methods of calculating risk reduction, and also by showing more disaggregated results relevant to the construction of specialist, sector‐focussed funds.

Residential property loans and bank performance during property price booms: evidence from Europe

Understanding the performance of banks is of the utmost importance due to the impact the sector may have on economic growth and financial stability. Residential mortgage loans constitute a large proportion of the portfolio of many banks and are one of the key assets in the determination of their performance. Using a dynamic panel model, we analyse the impact of residential mortgage loans on bank profitability and risk, based on a sample of 555 banks in the European Union (EU-15), over the period from 1995 to 2008. We find that an increase in residential mortgage loans seems to improve bank’s performance in terms of both profitability and credit risk in good market, pre-financial crisis, conditions. These findings may aid in explaining why banks rush to lend to property during booms because of the positive effect it has on performance. The results also show that credit risk and profitability are lower during the upturn in the residential property cycle.