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Convergence in the UK direct real estate market

Convergence in the UK direct real estate market PurposeThe purpose of this paper is to empirically examine the issue of convergence in the monthly returns, rental growth and yields for ten market segments in the UK direct real estate market, using monthly data over the period from January 1987 to December 2014.Design/methodology/approachThe methodology used to determine convergence is principal component analysis as it provides an assessment of the extent to which the variance of the market segments can be represented by a single common factor, explaining their long-run behaviour, and the degree of independence between the market segments.FindingsThe results suggest that there is strong evidence of convergence over the entire sample period in relation to monthly returns and yields but less evidence of convergence in rental growth, which confirms the findings in previous studies in international markets.Practical implicationsThe evidence also suggests that convergence has increased over the sample period and that convergence is period specific and was particularly strong during and after the period of the Global Financial Crisis, which implies that the UK direct real estate market is largely integrated and as a consequence the extent of diversification potential in the market is still severely limited.Social implicationsThe convergence in returns has crucial implications for investors as it leaves investors exposed to the same structural shocks and so magnifies the importance of volatility spillover effects, limits their ability to create well-diversified portfolios and make it more difficult for fund managers to outperform the market.Originality/valueThis is the first paper to examine the convergence in the UK direct real estate market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Property Investment & Finance Emerald Publishing

Convergence in the UK direct real estate market

Journal of Property Investment & Finance , Volume 35 (4): 15 – Jul 3, 2017

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References (57)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1463-578X
DOI
10.1108/JPIF-06-2016-0043
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to empirically examine the issue of convergence in the monthly returns, rental growth and yields for ten market segments in the UK direct real estate market, using monthly data over the period from January 1987 to December 2014.Design/methodology/approachThe methodology used to determine convergence is principal component analysis as it provides an assessment of the extent to which the variance of the market segments can be represented by a single common factor, explaining their long-run behaviour, and the degree of independence between the market segments.FindingsThe results suggest that there is strong evidence of convergence over the entire sample period in relation to monthly returns and yields but less evidence of convergence in rental growth, which confirms the findings in previous studies in international markets.Practical implicationsThe evidence also suggests that convergence has increased over the sample period and that convergence is period specific and was particularly strong during and after the period of the Global Financial Crisis, which implies that the UK direct real estate market is largely integrated and as a consequence the extent of diversification potential in the market is still severely limited.Social implicationsThe convergence in returns has crucial implications for investors as it leaves investors exposed to the same structural shocks and so magnifies the importance of volatility spillover effects, limits their ability to create well-diversified portfolios and make it more difficult for fund managers to outperform the market.Originality/valueThis is the first paper to examine the convergence in the UK direct real estate market.

Journal

Journal of Property Investment & FinanceEmerald Publishing

Published: Jul 3, 2017

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