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Real Estate for the Long Term: The Effect of Return Predictability on Long-Horizon Allocations

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  • Gregory H. MacKinnon
  • Ashraf Al Zaman
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    Abstract

    We examine how the predictability of real estate returns affects the risk of, and optimal allocations to, real estate for investors of differing investment horizons. Returns to direct real estate are mean reverting, and risk decreases with horizon. This is driven by a tendency for property transaction prices to overshoot inflation. Mean reversion in real estate returns is weaker than that of equities, resulting in real estate having similar risk to equities for long-term investors. However, optimal portfolios have large allocations to direct real estate at all horizons, and the allocation increases with horizon. Finally, we find that real estate investment trusts are a redundant asset class for investors with access to direct real estate as an asset class, but they do have a role in optimal allocations when direct property investment is not feasible. Copyright (c) 2009 American Real Estate and Urban Economics Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6229.2009.00237.x
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    Bibliographic Info

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 37 (2009)
    Issue (Month): 1 ()
    Pages: 117-153

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    Handle: RePEc:bla:reesec:v:37:y:2009:i:1:p:117-153

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    Cited by:
    1. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2010. "1/N and long run optimal portfolios: results for mixed asset menus," Working Papers 2010-003, Federal Reserve Bank of St. Louis.
    2. Hoesli, Martin & Oikarinen, Elias, 2012. "Are REITs real estate? Evidence from international sector level data," Journal of International Money and Finance, Elsevier, vol. 31(7), pages 1823-1850.
    3. S. Price & Dean Gatzlaff & C. Sirmans, 2012. "Information Uncertainty and the Post-Earnings-Announcement Drift Anomaly: Insights from REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 250-274, January.
    4. Ranajit Kumar Bairagi & William Dimovski, 2010. "The underpricing of US REIT IPOs: 1996--2010," Journal of Property Research, Taylor & Francis Journals, vol. 28(3), pages 233-248, December.

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