Marketing Period Risk in a Portfolio Context: Theory and Empirical Estimates from the UK Commercial Real Estate Market
26 Pages Posted: 20 Jan 2006
Date Written: May 2005
The role of selling (or marketing) period uncertainty in understanding risk associated with property investment is examined in this paper. Using an approach developed by Lin and Vandell [2001, 2005] and Lin , combined with a statistical model of UK commercial property transactions, we show that the ex ante level of risk exposure for a commercial real estate investor is around one and a half times that obtained from historical statistics. The risk related to marketing time uncertainty can be reduced by constructing a portfolio. We find that at least 10 properties are necessary to reduce this risk, assuming independence between marketing period risk and price risk. These findings have important implications for mixed-asset portfolio allocation decisions.
Keywords: liquidity risk, commercial real estate
JEL Classification: G11, R33
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