Summary
The links across and comovements between the New York City and London office markets are examined in the context of similarities in both the underlying economic specialization of the two cities and their positions as two of the most liquid international office markets. The results reveal strong linkages in the total returns between the two markets. While there is a lack of significant cointegration and causality results with regard to the rental markets, there are similarities in the underlying driving forces. The results indicate that investment behavior contributes more to their commonality than do underlying economic forces. Further, the role of the stock market in the performance of both real estate markets is highlighted. The paper draws on the findings to highlight the potential trade-off that investors face between diversification and liquidity in international office markets.
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Extract
Ny-Lon: Does a Single Cross-Continental Office Market Exist?
A large literature has developed that examines the diversification strategies most suited to a real estate portfolio. Much of this debate has centered on the relative attractiveness of regional or sector diversification. However, more recent evidence suggests that benefits from diversification are not purely driven by either the sector or the region in which a property is located. A number of papers have examined the potential for diversifying on an economic basis, based on the rationale that different economic driving forces will dominate markets with different economic characteristics. This means that similar localized systematic effects will affect all sectors in a single market. In addition, pure geographic distance does not guarantee diversification if the markets have similar economic driving forces. This applies equally at national and international levels.
A number of studies, such as De Wit and van Dijk (2003), have illustrated that the same economic factors influence the rate of change in real estate returns across continents. If convergence in global economic performance occurs, this may lead to increasingly synchronous real estate market performance in the major global cities. This would leave real estate managers with the difficult challenge of achieving economic diversification within an increasingly integrated system of real estate markets.These common driving forces have two main additional implications. First, due to the nature of real estate markets, international investors tend...See the full content of this document
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