A macro-economic indicator-based risk management strategy for the small property investor

It is generally believed that the principles of modern portfolio theory (MPT) may be applicable to small direct property investments, to formulate an investment risk management strategy, which is embedded in the conceptual stages of the investment and thus reduce the reliance on often, ineffective, active management and remedial strategies during the holding period. The main obstacle, however, is that the application of MPT requires an industry benchmark or index, which is representative of the market and against which performance may be measured. This paper investigates the possibility of deriving an investment-specific benchmark or a hypothetical return curve based on the relationships that exist between the macro-economy and the property market. This would make it possible for small property investors to apply the risk management principles inherent to portfolio investing and incorporate these principles in the feasibility cash flows of small direct property investments.