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

This paper 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 paper 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 non-core 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