Diversification strategies for the property element of portfolios have traditionally been undertaken on a sectoral/regional basis, primarily due to data restrictions. However, the standard regions in the UK are defined for administrative purposes and are likely, therefore, to be composed of heterogeneous property markets. The development of an alternative classification, based on local property markets, is investigated. This is based on annual retail rental growth rates and is developed using cluster analysis. A number of issues emerge. Throughout the various stages of development and tests for temporal stability, the local markets group according to broad underlying rental drivers. However, more tightly defined clusters are unstable over time as a consequence of rental volatility at the local level. It is clear that markets do not form groups conforming to the geographical regions that are widely analysed and that traditionally form the basis for diversification.
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