Benefits of Real Estate Investment

Abstract

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

Time-varying correlation between stock market returns and real estate returns

“…Thus, because the market value of real estate is infrequently observed, appraisal based valuation is commonly relied upon for real estate portfolios. Nevertheless, there is a range of corrections available for these estimation issues (Byrne and Lee, 1995;Cho et al, 2003;Geltner and Goetzmann, 2000;Georgiev et al, 2003;MacGregor and Nanthakumaran, 1992;Newell and MacFarlane, 1996). Indirect investment offers a more liquid real estate investment but there is also some scepticism in the literature about the performance of this asset class (Brounen and Eichholtz, 2003;Byrne and Lee, 1995;Clayton and MacKinnon, 2001;Feldman, 2003;Georgiev et al, 2003).…”

“…Nevertheless, there is a range of corrections available for these estimation issues (Byrne and Lee, 1995;Cho et al, 2003;Geltner and Goetzmann, 2000;Georgiev et al, 2003;MacGregor and Nanthakumaran, 1992;Newell and MacFarlane, 1996). Indirect investment offers a more liquid real estate investment but there is also some scepticism in the literature about the performance of this asset class (Brounen and Eichholtz, 2003;Byrne and Lee, 1995;Clayton and MacKinnon, 2001;Feldman, 2003;Georgiev et al, 2003). Estimation issues, arising from share market microstructure effects, could also affect returns calculated for this class of real estate investment (Brounen and Eichholtz, 2003;Georgiev et al, 2003).…”

“…Indirect investment offers a more liquid real estate investment but there is also some scepticism in the literature about the performance of this asset class (Brounen and Eichholtz, 2003;Byrne and Lee, 1995;Clayton and MacKinnon, 2001;Feldman, 2003;Georgiev et al, 2003). Estimation issues, arising from share market microstructure effects, could also affect returns calculated for this class of real estate investment (Brounen and Eichholtz, 2003;Georgiev et al, 2003). While we do not attempt to remove equity market microstructure effects, due to the arbitrary nature of these corrections, we do correct for serial correlation induced by appraisal based valuation and stale prices in our final model specification, using a simple time series adjustment.…”

Risk-Adjusted Performance of Malaysian Real Estate Investment Trust Funds

“…While Kuhle (1987) and Gyourko and Nelling (1996) find little value of including REITs in an existing investment portfolio, the results of Lee and Stevenson (2005) indicate that investors gain diversification benefits when REITs are added into an existing portfolio that comprises a mixture of several other assets. The findings of Georgiev et al (2003) show that REITs not only are poor substitution for direct investment in the property market but also provides no diversification benefits when invested together with stocks and bonds. On the other hand, investment in direct property is shown to generate some diversification benefits when invested with stocks and bonds.…”

The Performance of Option-Based Default Risk Models on Commercial Mortgages

“…7 In addition, we use the standard deviations of the NCREIF unsmoothed returns on different property types, estimated by Georgiev, Gupta, and Kunkel [2003] during the period between 1990 and 2001, as the proxies of the volatilities of rate of return on properties (σ V ). The advantage of the unsmoothed returns is to avoid the potential bias of the appraisal-based NCREIF index return due to the autocorrelation problem (Gatzlaff and Geltner [1998] and Clayton, Geltner, and Hamilton [2001]).…”