The influence of ownership sector allocation and investment style on portfolio volatility
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The Influence Of Ownership, Sector Allocation And Investment Style On Portfolio Volatility. Sebastian Gläsner IPD Investment Property Databank GmbH, Wiesbaden. Research motivation.

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The Influence Of Ownership, Sector Allocation And Investment Style On Portfolio Volatility

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The influence of ownership sector allocation and investment style on portfolio volatility

The Influence Of Ownership,Sector Allocation And Investment Style On Portfolio Volatility

Sebastian Gläsner

IPD Investment Property Databank GmbH, Wiesbaden


Research motivation

Research motivation

  • The German property market described by the IPD Total Return index DIX showed low volatility over the last two decades

  • Even in times of worldwide financial crisis in 2008 and 2009, the Total Return remained (slightly) positive

  • The underlying property appraisals have frequently been criticised for smoothing and lagging tendencies as a consequence of “sustainable” factors that enter the valuation process

  • Although the polycentric German property market does not necessarily need to show as much volatility as for example the London-focused UK market, we want to deepen our understanding of the index performance


German properties of foreign investors

German properties of foreign investors

  • As IPD offers specialised benchmarks for groups of clients, such as e.g. insurances, we compared the group “foreign investors” to the German investors

  • Data refers to standing investments only (no transactions, no developments)

  • Index calculation is capital weighted (IPD standard)


Investor performance total return

Investor performance –Total return

  • Sharpe outperformance of foreign investors from 2003 to 2007, peak in 2006

  • Strong underperformance in 2008 and 2009


Investor performance income return

Investor performance –Income return

  • Constantly higher income returns of foreign investors


Sector allocation

Sector allocation

  • Foreign investors are strongly over-allocated in sector industry (32.4% vs. 2.3%)

  • Both investor groups have a focus on office and retail investments


The german index by investor groups

The German index by investor groups

  • We assigned each portfolio to an investor type:

    • Asset manager

    • Foreign investor

    • Insurance

    • Open-end fund (retail and institutional)

  • As we apply statistical analysis, each property has the same weight, the “index” is not capital weighted like IPD standard

  • We excluded properties with a CV of less than 500.000 EUR from the analysis


Data investors in the german dix

DataInvestors in the German DIX


Properties by investor group

Properties by investor group


Investors in the german dix means of total returns

Investors in the German DIXMeans of Total Returns

Foreign investors achieved higher total returns in 2006 and 2007 and lower total returns in 2008 and 2009 in all analyzed sectors


Investors in the german dix standard deviation of total returns

Investors in the German DIXStandard deviation of Total Returns

The spread (sd) between singleproperty returns within the groups does not vary significantly


Foreign investments are more volatile

Foreign investments are more volatile

  • Foreign investors:Mean total returns of 7.7% in 2006/2007

  • Returns dropped to 0.1% in the 2008/2009 period

  • Domestic investors:

  • Mean TR of 3.7% in the 2006/2007 period

  • Even higher returns (4.2%) in 2008/2009

-30% -20% -10% 0% +10% +20% +30%


Industry investments are more volatile

Industry investments are more volatile

  • DIX (excl. industry):

  • Mean total returns of 3.9% in 2006/2007

  • Similar returns of 3.3% in the 2008/2009 period

  • Industry sector:

  • Mean TR of 5.5% in the 2006/2007 period

  • Sharpe decline to -1.6% in 2008/2009

  • >>> As foreign investors are stronglyover-allocated in the industry segment, both effects interfere

-30% -20% -10% 0% +10% +20% +30%


Retail properties domestic vs foreign investors

Retail properties: Domestic vs. foreign investors

  • Analysis of retail sector, as both investor groups have sufficient assets for comparison

  • Domestic retail investors

  • Low total returns of 2.3% in 2006/2007

  • Higher returns of 3.5% in the 2008/2009 period

  • Foreign retail investors:

  • Mean TR of 8.6% in the 2006/2007 period

  • Sharpe decline to 0.9% in 2008/2009

  • >>> As each group has more than 100 retail properties in every analyzed year, the conclusion is that foreign investors had their assets appreciated in the 2006/2007 period and depreciated in the 2008/2009 period. For German investors there was only a minor change in the market values of their retail investments

-30% -20% -10% 0% +10% +20% +30%


Accounting for investment risk

Accounting for investment risk

  • To account for different risk levels of investments, analysis focuses on capital growth rather than Total Return

  • The risk of a property is measured by the maximum income return the property realized between 2000 and 2009

  • The terciles of the resulting distribution of income returns define the dummy regression groups “IRlow”, “IRmed” and “IRhigh”


Dummy regression explaining capital growth 2009 by investor type sector and income return

Dummy regression: Explaining capital growth 2009 by Investor type, sector and income return

  • Foreign investments have significantly lower capital growth


Dummy regression explaining capital growth 2008 by investor type sector and income return

Dummy regression: Explaining capital growth 2008 by Investor type, sector and income return

  • Foreign investments have significantly lower capital growth


Dummy regression explaining capital growth 2006 by investor type sector and income return

Dummy regression: Explaining capital growth 2006 by Investor type, sector and income return

  • Foreign investments with higher growth rates, but not significant due to few observations

  • Neither significant results for 2007 and 2005


Overview significant capital growth differences 2005 2009

Overview: Significant capital growth differences 2005-2009

  • Stars indicate significance level, “sign” refers to the sign of the estimate, i.e. whether the deviation is positive or negative

  • Foreign investments deviate highly significant negative in 2008 and 2009

  • Objects with high income returns were appreciated in 2005 and depreciated in 2008


Dummy regression significant capital growth differences retail 2005 2009

Dummy regression: Significant capital growth differences retail 2005-2009

  • Capital growth of foreign investments deviates highly significant negative in 2008 and 2009 and positive between 2005 and 2007

  • Objects with high income returns were depreciated in 2008


Sum up

Sum up

  • Volatility of total return differs between domestic and foreign investors in Germany

  • Foreign investors are strongly over-allocated in the industry segment

  • Asset allocation is a necessary control variable when comparing domestic and foreign investments on the German market

  • Retail investments of foreign investors showed significantly more volatility between 2005 and 2009

  • Open research questions:

    • Are foreign investors more opportunistic than domestic investors (by the fact that they went abroad)?

    • Differences between foreign and domestic investors in other countries?

    • Differences in the selection of properties within a sector (core office versus opportunistic office within Frankfurt)?


Thank you for your attention

Thank you for your attention!

IPD Investment Property Databank GmbH

Kirchgasse 2

65185 Wiesbaden

Dr. Sebastian Gläsner

Telefon: (0611) 33 44 99 – 89

[email protected]


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