Abstract:
This paper investigates the role of tenant characteristics in diversification strategy for commercial real estate investment. The recognition of the impact of the tenant characteristics gives rise to the concept of diversification by tenant characteristics. The rationale for diversification strategy by tenant characteristics is that the tenant characteristics influence the valuation of lease contract and then indirectly impact the parameters of the return and risk of real estate asset. This study uses the annual performance of individual real estate assets owned by Listed Property Portfolios in New Zealand. Hypothetical portfolios have been constructed in accordance with different tenant characteristics of each building. Time-series performances of each hypothetical portfolio are examined and the stock performances of Listed Property Portfolios are tested against their tenant compositions. Our empirical results show that tenant’s business industry is an important character which significantly influences the time-series performance of real estate assets. The findings of this study have important implications for real estate investors, portfolio managers, and fellow researchers in this field. Key Words: portfolio diversification, tenant characteristics, asset performance