The benefits of sector and regional diversification have been well documented in the literature but have not previously been investigated in Italy. Using annual data from 1989 to 2003 we decompose property returns into a national effect three sector specific-effects and four economic regional factors. In contrast, to previous studies we find that regional factors effects in Italy have a much greater influence on property returns than sector-specific effects. This maybe the result of using economically defined regions rather than those based on geographical location. Nonetheless, the results strongly suggest that that diversification across the regions of Italy used here is likely to offer larger risk reduction benefits than a sector diversification strategy within a region. A fund manager in Italy must, therefore, monitor the regional composition of their portfolios more closely than its sector allocation.