Articles on the impact of diversification on real estate firms

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School of Engineering | Doctoral thesis (article-based)
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Date

2025

Department

Rakennetun ympäristön laitos
Department of Built Environment

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Language

en

Pages

34 + app. 72

Series

Aalto University publication series Doctoral Theses, 12/2025

Abstract

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.

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Supervising professor

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

Thesis advisor

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

Keywords

real estate, diversification, firm value, cost of debt, operating efficiency, credit risk, risk premium

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Parts

  • [Publication 1]: Ibrahim, I., & Falkenbach, H. (2023a). Diversification and cost of public debt for REITs: Evidence from the US. Journal of Real Estate Portfolio Management, 1–18.
    Full text in Acris/Aaltodoc: https://urn.fi/URN:NBN:fi:aalto-202408285956
    DOI: 10.1080/10835547.2023.2233348 View at publisher
  • [Publication 2]: Ibrahim, I., & Falkenbach, H. (2023b). International diversification and European firm value: The role of operating efficiency. Journal of European Real Estate Research, 16(3), 381–397.
    Full text in Acris/Aaltodoc: https://urn.fi/URN:NBN:fi:aalto-202312117209
    DOI: 10.1108/JERER-07-2023-0025 View at publisher
  • [Publication 3]: Ibrahim, I., & Falkenbach, H. (2024, Under Review) Does diversification matter in times of high market volatility? Submitted to Journal of Real Estate Research

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https://urn.fi/URN:ISBN:978-952-64-2360-9

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[diss] Insinööritieteiden korkeakoulu / ENG