Why Residential Property in Institutional Investor's Portfolios: The Dutch, Swedish and Swiss Cases

This study evaluates residential property as an institutional asset group in three European countries (The Netherlands, Sweden and Switzerland). These are countries where the involvement of institutional investors in private rented housing is significant compared to other countries in Western Europe, even though the respective relative importance of private rental provision varies substantially. Three criteria, familiar from the literature, are used to evaluate residential property as an institutional asset group. First, the rental market available for institutional investors must be sufficiently large in order to provide significant diversification benefits. Second, housing must offer good meanvariance performance. Third, residential property must provide a good hedge against inflation. Direct residential property is compared with other asset groups: shares (domestic and European indices), government bonds and indirect non-residential property. A bootstrap analysis (Efron (1979), Liang et al (1996) and Ziobrowski el al. (1997)) is employed to estimate confidence intervals for the optimum level of residential property in mixed-asset portfolios. The Fama and Gibbons (1982) approach is used to test the inflationary hedging capabilities of residential property over shares, bonds and nonresidential indirect property. The paper concludes, on balance, that there is a case for a residential property component within portfolios in the case study countries.