How do non-core allocations affect the risk and returns of private real estate funds?

USC Lusk Center of Real Estate Working Paper Series, 2020

52 Pages Posted: 17 Jun 2020 Last revised: 1 Feb 2022

See all articles by Spencer J. Couts

Spencer J. Couts

University of Southern California - Sol Price School of Public Policy; USC Lusk Center of Real Estate

Date Written: November 15, 2021

Abstract

This paper documents that funds with greater non-core allocations have higher market risk exposure, beta, but lower returns. Additionally, it documents that one reason their returns are lower is because they poorly time their investment into these properties. Open-end private real estate funds have higher non-core allocations at the top of the market and lower allocations at the bottom. As such, these funds are disproportionately exposed to the downside of the market. Lastly, I find that reaching for yield and fund flow pressure are important determinants of this phenomenon. Funds buy relatively more non-core properties when either the market return expectations or their net queues are smaller. Buying more core properties when queues are larger enables managers to place capital quicker, but it also hurts existing investors by decreasing their market risk exposure at the time when it is the most desirable and beneficial.

Keywords: Asset Pricing, Risk Factors, Factor Loadings, Commercial Real Estate

JEL Classification: G11, G12, G13, G14, G23, R33

Suggested Citation

Couts, Spencer J., How do non-core allocations affect the risk and returns of private real estate funds? (November 15, 2021). USC Lusk Center of Real Estate Working Paper Series, 2020, Available at SSRN: https://ssrn.com/abstract=3602196 or http://dx.doi.org/10.2139/ssrn.3602196

Spencer J. Couts (Contact Author)

University of Southern California - Sol Price School of Public Policy ( email )

Los Angeles, CA 90089-0626
United States

USC Lusk Center of Real Estate ( email )

650 Childs Way
Los Angeles, CA 90089
United States

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