Direct and Indirect Real Estate in a Mixed-asset Portfolio : Is direct or indirect preferable

• Main Author: Falk, Johan
• Format: Others
• Language: English
• Published: KTH, Fastigheter och byggande 2012
• Subjects: Modern portfolio theory; Mixed-asset portfolio; Diversification benefits
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:kth:diva-102185

Studies carried out during the 2000’s have shown that securitized real estate has outperformed the direct real estate market with as much as up to 500 basis points on an annual basis during the 80’s and 90’s. Allocation to real estate among institutional investors has at the same time been at around 5%. Research conducted in the area during this period has suggested an allocation to real estate around 10% - 20% in a mixed-asset portfolio, depending on the specifics of the real estate. Securitized and direct real estate come with different benefits and different problems, such as a better inflation hedge and asset-liability frameworks but worse information transparency for direct real estate, but a higher liquidity, return (including volatility) and information transparency for securitized real estate market. This research shows that during the period 2000-2010 securitized real estate still outperforms direct real estate. The spread during the period is as much as 762 basis points per annum. The highest risk-adjusted return is given to the investor who invests between 21% - 30% depending on the specifics of the real estate. However, noticeable is that risk factors such as illiquidity, lower transparency and geographical could eventually give another perspective on the outcome of the risk-adjusted return.