Property portfolio strategies should be of interest to many investors that hold several properties.
In such a case, although each property should be evaluated first on its own merit, it should also conform and to some broader portfolio strategies in terms of how it is compatible with pre-determined portfolio composition strategies aiming at minimizing portfolio risk and maximizing return. In general, property portfolio strategies can be classified on the basis of various parameters including among others, risk level, property type composition, and location composition.
Risk Level
Property portfolio strategies can be distinguished depending on their risk level, which can run from the lowest risk level to the highest, as reflected in the chosen types of investment opportunities pursued. The lowest risk level is represented by strategies targeting completed and fully leased commercial properties with credit A tenants and long-term leases. Such investments are often referred to as core investments.
The highest risk level is represented by strategies focusing on land development or the development of existing properties that require significant redevelopment of assets without any pre-committed tenants, or the acquisition of existing commercial buildings with high vacancy and high leasing risk. Such strategies, usually referred to as opportunistic, may allow for greater locational/geographic flexibility in order to be able to pursue the highest risk and highest return opportunities that may become available.
Property Type Composition
On the basis of property type composition, property portfolio strategies may focus on a single property type or multiple property types. Single-property-type strategies are founded on the argument of specialization, which is associated with superior expertise, knowledge, and, therefore, better performance. Strategies that focus on several property types are based on the argument of diversification and risk minimization. Such argument of course makes sense only if the different property types behave differently. Empirical evidence at the national level regarding the investment performance of various property types shows that with the exception of apartments, the other three major property types (office, retail, industrial, have shown considerable similarities in their historical performance). In particular, it seems that they have followed similar cyclical movements, but they have shown differences in terms of the timing of the turning points and the amplitude (severity of declines and increases)of their cycle. See the book
Profitable Property Investing, for more conclusions in terms of the cyclical movements in the performance of the various property types and how profitable buy-at-bottom and sel-at-the-top strategies might have been in the case of each type.
In any case, despite some considerable similarities in investment behavior of the various property types at the national level, it has been shown empirically that portfolios that include several property types are less risky than portfolios that include a single property type. Such property type diversification, if appropriately combined with location diversification, can provide maximum diversification benefits.
Location Diversification Strategies
Property portfolio strategies can also be classified in terms of location/geographic diversification. Property portfolios that focus on a single integrated real estate market are the least diversified in terms of location. A single integrated real estate market is geographically represented by a single metropolitan area, as properties within a single metropolitan area may be to some extent substitutable, while two properties in two non-neighboring metropolitan areas are hardly substitutable. At the other end, most locationally diversified property portfolios focus on several countries.
The essence of good locational diversification is to invest in real estate markets, which have different and non-related economic drivers in terms of property demand and property supply. However, with the globalization of the economy, more and more economies and real estate markets across different countries are becoming more interlinked and more similarly affected by global economic shocks that may affect local demand and supply for real estate.
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