The role of optimal regions in forming efficient real estate portfolios

As a method for diversifying within a real estate portfolio, most studies find economic regions superior to geographic regions. Economic regions can either be created by grouping local real estate markets according to supplyor demand factors or by clustering real estate return variables. An alternative way of grouping local real estate markets is to identify optimal regions from a portfolio efficiency perspective using an allocation optimizer. The optimal regions created are the most efficient in their respective risk segments, butthe gains in risk/return ratio compared to geographic and economic groupings must be balanced against potential losses in management efficiency and the predictability of future returns. QC 20170512