The relative importance of sector and regional factors in Italy
| Date | 24 April 2009 |
| Published date | 24 April 2009 |
| DOI | https://doi.org/10.1108/14635780910951975 |
| Pages | 277-289 |
| Author | Laura Gabrielli,Stephen Lee |
| Subject Matter | Property management & built environment |
The relative importance of sector
and regional factors in Italy
Laura Gabrielli
Faculty of Architecture, University of Ferrara, Ferrara, Italy, and
Stephen Lee
Faculty of Finance, Cass Business School, City University, London, UK
Abstract
Purpose – The relative benefit of sector and regional diversification is a topic of continuing interest
to academics, however, the issue has not previously been investigated in Italy. Additionally, previous
studies have used geographically defined regions, rather than economically functional areas, when
performing the analysis even though most would argue that it is the economic structure of the area
that will lead to differences in demand and hence property performance. Therefore the purpose of this
paper is to use the economically defined regions of Italy to test the relative benefits of regional
diversification versus sector diversification within the Italian real estate portfolio.
Design/methodology/approach – The paper uses the dummy variable methodology of Heston and
Rouwenhorst on the sector and regional affiliation of 27 cities in Italy using annual data over the
period 1989 to 2007 for three property-type: residential, retail and offices and four economically defined
regions: the North West, the North East, the Centre of Italy and the South and Islands.
Findings – In contrast, to previous studies it is found that the sector and regional factors effect the
returns of properties in Italy in almost equal measure, which is probably a result of using the diverse
economic regions of Italy rather than arbitrary geographically locations. Nonetheless, the results show
that the sector factor has started to dominate the regional effect in Italy since 1997.
Originality/value – This is the first paper to study the relative benefits of sector and regional
diversification in Italy. Additionally, this is the first paper to use regions which are defined on an
economic functional basis rather than a geographical basis. The results suggest that, unlike managers
in other countries, Italian real estate managers need to monitor both the regional and sector
composition of their portfolios.
Keywords Real estate, Economic sectors, Italy
Paper type Research paper
1. Introduction
The relative benefit of sector and regional diversification is a topic of continuing
interest to academics. In order to examine this issue most studies have used the
dummy variable methodology of Heston and Rouwenhorst (HR) (1994). In this
approach the returns of real estate are assigned variables that identify its sector and
regional affiliation. Thus, when these dummy variables were regressed on the
cross-section of property returns, the estimated coefficients on the dummy variable s
are the implicit, or “pure”, return effects of the different factors. The majority of work
concluding that sector (property-type) diversification is preferable to regional
(geographical) diversification in terms of risk reduction.
For instance, Fisher and Liang (2000) used the dummy variable appro ach to
decompose the returns of US real estate into four sectors and four regions.
Using quarterly returns from the NCREIF database over the period 1978:Q1 to 19 99:Q4
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Sector
and regional
factors
277
Received August 2007
Accepted December 2008
Journal of Property Investment &
Finance
Vol. 27 No. 3, 2009
pp. 277-289
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780910951975
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