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The Allocation of Real Estate to Future Mixed-Asset Institutional Portfolios

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Abstract

This paper uses the mean-variance framework to investigate real estate's role in an institutional portfolio. Unlike previous research, however, the paper does not assume a value for future real estate returns. Instead, it is assumed that real estate is held in the portfolio, and the level of expected return that is needed to justify the allocation is determined. Gross returns in the 10%-12% range appear to be sufficient; however, such returns are considerably greater than the sector's recent performance. The impact of adding real estate to a benchmark portfolio is reexamined using the shortfall risk approach. Finally, several caveats about using the mean-variance technique with real estate are described.

Suggested Citation

  • S. Michael Giliberto, 1992. "The Allocation of Real Estate to Future Mixed-Asset Institutional Portfolios," Journal of Real Estate Research, American Real Estate Society, vol. 7(4), pages 423-432.
    • Handle: RePEc:jre:issued:v:7:n:4:1992:p:423-432
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    References listed on IDEAS

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    1. David J. Hartzell & James R. Webb, 1988. "Real Estate Risk and Return Expectations: Recent Survey Results," Journal of Real Estate Research, American Real Estate Society, vol. 3(3), pages 31-37.
    2. S. Michael Giliberto, 1988. "A Note on the use of Appraisal Data in Indexes of Performance Measurement," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(1), pages 77-83, March.
    3. David Geltner, 1989. "Estimating Real Estate's Systematic Risk from Aggregate Level Appraisal‐Based Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 463-481, December.
    4. W. B. Brueggeman & A. H. Chen & T. G. Thibodeau, 1984. "Real Estate Investment Funds: Performance and Portfolio Considerations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 333-354, September.
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    Cited by:

    1. Libbin, James D. & Kohler, Jeremy D. & Hawkes, Jerry M., 2004. "Does Modern Portfolio Theory Apply to Agricultural Land Ownership? Concepts for Farmers and Farm Managers," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2004, pages 1-12.
    2. Armonat, Stefan & Pfnür, Andreas, 2002. "Basel II and the German credit crunch?," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35585, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    3. Tom G. Geurts & Austin J. Jaffe, 1996. "Risk and Real Estate Investment: An International Perspective," Journal of Real Estate Research, American Real Estate Society, vol. 11(2), pages 117-130.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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