《JP Morgan Risks》.pdf

Nick Tyrrell – JPMorgan Asset Management October 2007 Risks, returns and correlations for global real estate markets Outside the Box For professional investors only – Not for public distribution JPMorgan Asset Management • Outside the Box • Risks, returns and correlations for global real estate markets 1 Executive summary In this paper we attempt to provide estimates of the main inputs needed to construct a global real estate portfolio. Firstly we look at existing market sizes, in terms of both the total and the invested stock of real estate, the latter being a measure of the “market” portfolio. We then derive estimates of risks, returns and correlations for global real estate across around fifty markets, based on analysis of movements in nominal GDP. Though there are large margins of error in any such exercise, we believe that the results are sufficiently robust – on both technical and intuitive grounds – to be used as an input to real-world investment strategy. Author’s note: This set of exercises – though ultimately relatively simple in execution – has been brewing for over a year and would not have been possible without the considerable help of colleagues at JPMorgan Asset Management. In particular, I would like to acknowledge the assistance of Jesse Bostwick and Quanwei Li in collecting and transforming data, and of Michael Giliberto and Sue Kolasa for their conceptual and technical guidance. 2 JPMorgan Asset Management • Outside the Box • Risks, returns and correlations for global real estate markets Outside the Box Risks, returns and correlations for global real estate markets One of the major trends in real estate capital markets in recent years has been the internationalisation of portfolios. The case for international diversification is compelling and well understood by most investors. It is based on four principal planks: • Diversification: Real estate markets are generally poorl