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EXPO 2015: Study gives optimal portfolio size

Research from CBRE Global Investors shows that adding more assets to a real estate portfolio doesn't always create the best diversification risk profile.

To achieve a 90 percent reduction of diversifiable risks, real estate managers should look to invest in 11 to 18 assets within a commingled fund or other investment vehicle, according to a study from CBRE Global Investors, the Los Angeles-based real estate investment manager.

The study, released at the Expo Real conference in Munich today, examines international real estate portfolio diversification, and specifically, looks at the number of assets that are required to build a successful portfolio.

The research explores the differences across several countries as well as throughout the across various stages of an economic cycle if portfolios are dominated by a few large assets. Additionally, the report examines what an investor can do and at the situation for an investor who wants to reduce the maximum risk, and The study also focuses on myriad aspects of portfolio construction, like asset size, tenant diversification, portfolio lease profile, and more.

For instance, when talking asset size, while it remains clear that when portfolios consist of very different asset sizes, more assets will be needed, enlarging a portfolio for the sake of it is not enough for risk diversification. In fact, adding one large asset to an existing portfolio can undermine the diversification benefit already achieved, said the study.

“We know sometimes people can be skeptical about diversification, and we often hear that in a crisis it is least effective, but we have found that the optimal portfolio size does not change during a crisis. This research allows us to examine how it works – and more importantly it looks at the parameters to ascertain and manage risk to ensure optimum returns,” said Pieter Roozenboom, head of global separate accounts, at CBRE GI.