Real Estate for the Long Term: The Effect of Return Predictability on Long-Horizon Allocations

37 Pages Posted: 27 Apr 2009

See all articles by Greg H. MacKinnon

Greg H. MacKinnon

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science

Ashraf Al Zaman

affiliation not provided to SSRN

Abstract

We examine how the predictability of real estate returns affects the risk of, and optimal allocations to, real estate for investors of differing investment horizons. Returns to direct real estate are mean reverting, and risk decreases with horizon. This is driven by a tendency for property transaction prices to overshoot inflation. Mean reversion in real estate returns is weaker than that of equities, resulting in real estate having similar risk to equities for long-term investors. However, optimal portfolios have large allocations to direct real estate at all horizons, and the allocation increases with horizon. Finally, we find that real estate investment trusts are a redundant asset class for investors with access to direct real estate as an asset class, but they do have a role in optimal allocations when direct property investment is not feasible.

Suggested Citation

MacKinnon, Greg H. and Al Zaman, Ashraf, Real Estate for the Long Term: The Effect of Return Predictability on Long-Horizon Allocations. Real Estate Economics, Vol. 37, Issue 1, pp. 117-153, Spring 2009, Available at SSRN: https://ssrn.com/abstract=1381639 or http://dx.doi.org/10.1111/j.1540-6229.2009.00237.x

Greg H. MacKinnon (Contact Author)

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science ( email )

Halifax, Nova Scotia B3H 3C3 B3H 3C3
Canada
902-420-5730 (Phone)
902-496-8101 (Fax)

Ashraf Al Zaman

affiliation not provided to SSRN

No Address Available

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