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

58 Pages Posted: 20 Jan 2017

See all articles by Joseph L. Pagliari

Joseph L. Pagliari

University of Chicago - Booth School of Business

Date Written: Spring 2017

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 infinite‐horizon 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.

Suggested Citation

Pagliari, Joseph L., Another Take on Real Estate's Role in Mixed‐Asset Portfolio Allocations (Spring 2017). Real Estate Economics, Vol. 45, Issue 1, pp. 75-132, 2017, Available at SSRN: https://ssrn.com/abstract=2902382 or http://dx.doi.org/10.1111/1540-6229.12138

Joseph L. Pagliari (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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