Articles on the impact of diversification on real estate firms

Real estate portfolio diversification is a common investment strategy among real estate firms worldwide. When implemented across markets with imperfectly correlated performance, diversification can reduce a firm's cash-flow volatility, positively impacting its capital costs and overall value. However, diversification can also increase agency and information costs, exacerbating issues such as overinvestment and inefficient capital allocation. Therefore, the net effect of diversification on a real estate firm reflects a balance between these potential benefits and costs. Accordingly, this dissertation quantitatively investigates the net effect of different dimensions of diversification on a real estate firm's capital cost and value. The dissertation empirically highlights, with robust evidence, that different dimensions of diversification can affect a firm's debt costs differently. Specifically, it finds that property-type diversification is associated with a decrease in public debt costs. In contrast, domestic diversification is associated with an increase in public debt costs. In the same context, this dissertation reveals that credit rating agencies and public lenders may assess the impact of diversification on credit risk differently. The present research also examines the impact of two levels of geographical diversification—domestic and international—on real estate firm value. International diversification may be more effective in delivering the benefits of geographical diversification due to the lower correlation between international markets compared to domestic markets, hence presenting a different effect on firm value. However, the findings illustrate that the potential benefits of geographical diversification, whether domestic or international, are often outweighed by negative implications stemming from agency and information problems, resulting in a reduction in firm value. Additionally, this dissertation identifies operating efficiency and risk premiums as channels through which geographical diversification can negatively impact firm value. Finally, the findings of this dissertation reveal time variation in the net effects of diversification, showing that the balance between the benefits and costs of diversification varies with market conditions. During periods of high market volatility, the benefits of diversification appreciate, counterbalancing the associated costs. At the same time, it is demonstrated that market volatility has adverse effects on real estate firms; however, diversified real estate firms experience a mitigated effect of market volatility. Consequently, the findings suggest that diversification can moderate the adverse effects of market volatility.

Department dc:contributor.department

Rakennetun ympäristön laitos

Grantor dc:publisher

Aalto University

Year dc:date.issued

2025

Author dc:creator

• Ibrahim, Islam

Advisor dc:contributor.advisor

• Falkenbach, Heidi, Assoc. Prof., Aalto University, Department of Built Environment, Finland

Contributors dc:contributor

• Aalto-yliopisto
• Aalto University

Language dc:language.iso

en

Repository record dc:identifier.uri

https://aaltodoc.aalto.fi/handle/123456789/132888

OAI record oai:identifier

https://aaltodoc.aalto.fi/server/oai/request?verb=GetRecord&metadataPrefix=dim&identifier=oai%3Aaaltodoc.aalto.fi%3A123456789%2F132888