Residential Real Estate in a Mixed-Asset Portfolio
28 Pages Posted: 27 Mar 2020
Date Written: June 22, 2017
Mixed-asset portfolio optimization consists in determining the best allocation among standard financial assets such as money market accounts, bonds, stocks and real estate asset as well. For this latter kind of asset, computing the optimal weight can be challenging. First, there is the need to specify the kind of real estate included in the portfolio (commercial, industrial, residential, direct, REIT shares). Second, the prices used to calibrate real estate values need to be chosen from alternatives like: appraisal values, actual real estate transactions, repeated sales, indices. In this paper we focus on private residential real estate returns, investigating the optimal weight of the real asset with respect to standard financial assets. Using quarterly data on housing indices for four European countries, France, Germany, UK and Spain, we address the question of how investing in housing affects the composition of an investor’s portfolio. We show in particular under which conditions we recover the typical 15%-20% real asset allocation.
Keywords: Real Estate Investment, European Residential Real Estate, Mixed Asset
JEL Classification: G11, G17, D14
Suggested Citation: Suggested Citation