European commercial property offers a greater opportunity for portfolio risk diversification compared with the UK, according to Seven Dials.
Seven Dials says that many investors are currently leaving domestic commercial property funds following a sharp fall in returns. Analysis of commercial property in five countries against the FTSE 100 shows good risk diversification benefits in international property, according to the group.
However, the fund-of-funds manager says large quantities of property are needed in a portfolio to provide a good diversification balance.
Simon Critchlow, director of Seven Dials, says: “Recent research conducted by the Investment Property Forum (IPF) in the UK on this issue – which comprised data drawn from 1,700 actual assets’ performance in the decade 1994-2004 – showed one needs around 300 properties to reduce portfolio tracking error to below 1 per cent vs the UK IPD index."
According to Critchlow, a level of 90% diversification is unattainable for most investors as they would need billions of pounds invested in European property, much more than is needed in a diversified UK portfolio.
Critchlow says that investors can still benefit from attractive European diversification through property fund-of-funds as several underlying funds can have a value of several billion euros.
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