Despite the recent focus on stocks and bonds, real estate remains a significant part of the institutional investment portfolio. This article reviews the existing literature and theory on commercial real estate as an investment vehicle and examines the investment benefits of real estate as a part of a diversified portfolio. The results suggest that direct real estate investment provides diversification benefits, while securitized real estate (REIT) investment does not. The conclusion is twofold: 1) real estate returns are determined by factors different from those driving the returns to other asset classes and hence may produce diversification benefits and 2) REIT investment is an inadequate substitute for direct investment in real estate.3
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