"The relative importance of sector and regional factors in Italy"

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. 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. 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. 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.