Another Take on Real Estate's Role in Mixed‐Asset Portfolio Allocations

Abstract

This article examines real estate's role in institutional mixed-asset portfolios using both private-and public-real estate indices, as a means of examining varying real estate-related risk/return opportunities. In so doing, this article also examines the effects of: (1) increasing the investment horizon, (2) placing constraints on the maximum allocation to any one asset class, and (3) varying the risk preferences of investors. The empirical results suggest-using infinitehorizon returns and all of the caveats that accompany such a perspective-that real estate allocations of approximately 10-15% of the mixed-asset portfolio represent an upper bound for most investors. For those investors preferring low-risk portfolios, (unlevered) private real estate is the vehicle serving this allocation preference; for those investors preferring high-risk portfolios, public real estate (with its embedded leverage of 40-50%) is the vehicle serving this allocation preference-with such vehicles serving as substitutes for a variety of noncore real estate strategies. In some sense, the distinction between private and public real estate is more about the use of leverage. For those investors preferring moderate-risk portfolios, an intermediate-leverage approach seems optimal.

Risk diversification gains from metropolitan housing assets

“…On the other hand, Sa‐Aadu, Shilling, and Tiwari () suggest that housing assets serve as powerful vehicles for hedging against adverse shocks to consumption, and they are thus able to improve portfolio performance. In a more recent study, Pagliari () examines the real estate role in institutional mixed‐asset portfolios using both private‐ and public‐real estate indices and suggests that asset–allocation preference depends on investors’ risk aversion: low(high) risk‐averse investors allocate more private (public, REIT) real estate assets in their portfolios.…”

Fair value in the professional valuation: concept and models

“…At the same time, it is also possible to simplify model (5) by introducing into it a number of simplifying assumptions; for example, assuming that the return dynamics in the investment portfolios of the parties to the transaction were to be equal, r s (i) = r b (i) = r(i), leads to the following reduction for (5): However, unlike in the "DCF market analysis", the uniform rates of return/discount should not be based on any presumed overall market models (let alone any normative market models, such as the CAPM model (Sharpe (1964)), but should reflect specific expectations of the returns on investment portfolios of the parties to the transaction --whereas such portfolios can be structured on principles other than the normative principles of portfolio diversification implicit in the Modern Portfolio and financial theories, and can also easily include illiquid assets, as they usually do (Pagliari, J. L. (2017); Anglin, P. M. and Gao, Y. (2011); Chu, Y.…”

Conditions and Directions of Investing on the World Real Estate Market

“…al. 2010;BRYX 2006;FORYŚ 2011;PAGLIARI 2017;FIGURSKA, WIŚNIEWSKI 2016). A review of the scientific output on the topic of the evolution of knowledge regarding real estate was presented, among others, by W. Breuer and C. Nadler, indicating works of Mertzke from the beginning of the past century, then later, onto publications of Wendt and Weimer from the 50s and 60s of the 20 th century, up to more current works from the 90s of the 20 th century in Diaz as well as Grissom and Liu, emphasizing the ecological aspects of the market.…”