The Global Real Estate Crash: Evidence from an International Database

Abstract

In this paper, we focus on the problem of international real estate diversification by examining the cross-sectional behavior of the international office market. We find clear evidence of a global market "crash" in 1992, which was preceded in most cases by declining property values since the end of the 1980's. While explanations for the U.S. real estate crash typically focus on local factors, we find the global crash to be closely related to world-wide declines in GNP. This is suggestive of global, rather than local explanatory factors. Our analysis suggests that the use of raw historical data for the construction of international portfolios is likely to be dangerously misleading, due to uncertainty regarding inputs to the mean-variance optimzation. The aggregation procedures we use reduce this uncertainty and provide guidelines for prudent cross-border diversification.