The transparency of the German property investment market has increased significantly over the last years, but there is still a lack of market analysis in the area of performance, risk, diversification and portfolio construction. This paper aims to test the empirical relationship between portfolio size, diversification and risk in institutional real estate portfolios in Germany during 1997-2002 to determine the optimal portfolio size and sector attribution. General financial risk analysis suggests that there is an inverse relationship between portfolio size and risk, in other words, the greater a portfolioÌs asset size, the lower its risk. Thus reflects the fact that portfolios with greater asset size have a greater potential of diversification to lower portfolio specific risk. Diversification takes many forms, it can be sectoral/regional or it can be associated with any other asset characteristics. The paper will explore the different strategies of diversification and its impact on portfolio risk. With this analysis the paper makes a valuable contribution to real estate investment analysis with a European-wide focus. It adopts approaches previously used in the UK property market and applies them to the German market and thus increases the comparability and transparency of European real estate markets.