Diversification Potential from Real Estate Companies in Emerging Capital Markets

Executive Summary. This study uses the Emerging Markets Data Base from the International Finance Corporation to examine emerging market real estate as an asset class using data on companies classified as real estate firms by SIC codes. It documents the paucity of such firms until very recent years and notes some limitations in their use as proxies for the underlying real estate investment opportunities. Nevertheless, the results indicate that real estate in emerging markets provides diversification benefits to common stock portfolios and real estate portfolios. Emerging market real estate has experienced high risk in recent years, but the returns from emerging market real estate have generally low correlations with the returns on portfolios of developed-market stocks and/or real estate. This study also describes investment restrictions that limit foreign access to direct investment in emerging market real estate. The relaxation of such restrictions in the case of other asset classes has been met with significant increases in market values. Finally, institutional facts about emerging markets that have acted to limit public ownership of real estate assets within those markets are described.