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CORRELATIONS - THE KEYS TO A DIVERSIFIED REAL ESTATE PORTFOLIO IN INDONESIA

Updated: Feb 18, 2023

ID HOTELIER - A range of factors could significantly impact the commercial real estate market in Indonesia over the next five years. These include a large and young population with a rising disposable income, significant reform momentum by the government, and public infrastructure development. The growth in foreign direct investment is also a critical factor in the growth of the commercial property sector.

Apartment
Apartment

Bank Indonesia's 3Q 2022 Commercial Property Index reported that momentum for leased commercial property grew by almost 7% (YoY) in the quarter. It also revealed that the price index for hotels grew by 37.8% in 2Q 2022 (YoY) and 43.2% in 3Q 2022 (YoY).




With significant variations in the performance of the major property types since 2017, many diversified real estate investors are reviewing their investments in the hotel sector. The key factor influencing the risk of a property portfolio is the correlation of returns between asset classes. The risk of a portfolio can be reduced significantly if an investor can add hotels that are negatively correlated with current holdings.


Diversified Real Estate Portfolio in Indonesia
Diversified Real Estate Portfolio in Indonesia

However, the combination of less than perfectly correlated assets will also reduce risk. Those hotels that are negatively correlated should be highly prized and investors should be prepared to pay more to acquire these assets because of their diversification benefits. The contribution a hotel makes to a diversified portfolio should therefore be a key factor in determining its price.



The table below provides the correlation coefficients for the YoY growth in Bank Indonesia's Property Price Indices. The correlation coefficient measures the similarity of how two indices have varied over the same period. It can range from +1 which indicates that the two asset classes move in lockstep with each other or a value of –1 which indicates the two property types vary in perfectly opposite ways.


Correlation analysis provides a rigorous answer to the question of which property types are complements and which are substitutes in the context of a portfolio. Based on the performance of the major property types between 1Q 2017 and 3Q 2002, strata-title offices and retail are seen as compliments to hotels with correlation coefficients of -0.36 and -0.37 respectively. Apartments are seen as substitutes with a correlation coefficient of 0.73.



 

About Writer

Ross Woods is a seasoned hotel investment advisor with over 30 years of global experience in hotel asset management, portfolio management, and hotel advisory services. Known for his collaborative-based consulting style that integrates a high level of strategic and analytical expertise, his “smarts” are sought by clients to solve complex issues, make better decisions and realize the highest risk-adjusted investment returns.


His clients include banks, private investors, REITs and hotel management companies in the United States, South East Asia, Australasia, Europe, and Dubai.

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