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DTZ Insight

Property Market Correlations : benefits of diversification to re-emerge

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In this report we compare the relationship between the total returns of property, equities and bonds in Europe, Asia Pacific and the US. This allows us to consider the diversification benefits of investing in property compared to equities and bonds.
In Europe property returns have historically had a weak positive correlation with equity returns. This means that a mix of European property and equities has offered diversification benefits to a multi-asset portfolio. On the other hand, property returns have been negatively correlated with bonds. This shows that their combination offers strong diversification benefits. In Asia Pacific, property returns have shown no relation to returns in other asset classes.
Over the past decade, we have seen a positive correlation between the performance of property markets across regions. Asia Pacific and US property markets have had the highest correlation, with the correlation between Europe and Asia Pacific also relatively high, while European and US property markets have had the lowest positive correlation.
The average degree of correlation between property markets within the same region has increased in recent years. This means that limiting investments to property inside Europe, Asia Pacific or the US has become less effective in reducing risk.
However, property still offers considerable diversification benefits when compared to equities and bonds. Returns for both of these asset classes have tended to be more highly correlated than for property in each region.
Over the next five years we expect that investors will benefit from a diversified property portfolio to a far greater extent than we have seen in the past. Figure 1 shows the expected decrease in correlations between property markets within Europe, Asia Pacific and the US over the period 2012-16.

Source : DTZ (Groupe UGL)

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