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Building Targeted Real Estate Portfolios: How Many Assets to Replicate the Market?

Investors often target certain markets when executing their allocation strategies. However, differences between individual properties and high asset-specific risk mean that holding just one or two assets is not usually sufficient to replicate the market. This paper — which uses an example of an investor targeting specific global office markets — shows that a representative exposure could have been achieved with portfolios approaching 10 assets in size. Most of the reduction in tracking error comes from the first few assets acquired, but investors should be aware that the number of assets needed to approach market exposure can vary from market to market.