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The Role of Real Estate in an Institutional Investor's Portfolio Revisited


  • Gregory H. Chun


  • J. Sa-Aadu


  • James D. Shilling



Many papers have recently pointed out that institutional investors allocate only a very small fraction of their portfolio to real estate, much smaller than theory would dictate. This raises the question, are institutional investors underinvested in real estate equities? Or do we simply have the wrong priors? This paper is an attempt to provide some new insights into this asset allocation paradox. The key conclusions of the paper are several: First, unlike other assets, it would appear that real estate, and real estate diversification, pays off at the very time when the benefits are most needed, that is, when consumption growth opportunities are low. Second, real estate returns are predictable. In fact, the amount of predictability in real estate returns appears to be about the same as in stock returns. Third, real estate performs well in an asset-liability framework. Fourth, the chance of experiencing a large loss on real estate over a long horizon is quite small. We also report here that private sector commercial real estate investments represent between 6 and 12 percent of investable wealth in the United States. Thus, it follows (if one believes the capital asset pricing model) that if institutional investors were to invest more in real estate (up to 12 percent of their assets), they should be able to eliminate nonmarket or unique risk. All of this leaves us a bit dumbfounded as to why institutional investors hold only between 2 and 3½ percent of their assets in real estate.

Suggested Citation

  • Gregory H. Chun & J. Sa-Aadu & James D. Shilling, 2004. "The Role of Real Estate in an Institutional Investor's Portfolio Revisited," The Journal of Real Estate Finance and Economics, Springer, vol. 29(3), pages 295-320, November.
  • Handle: RePEc:kap:jrefec:v:29:y:2004:i:3:p:295-320

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    Cited by:

    1. J. Sa‐Aadu & James Shilling & Ashish Tiwari, 2010. "On the Portfolio Properties of Real Estate in Good Times and Bad Times1," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 529-565, September.
    2. Charles-Olivier Amédée-Manesme & Fabrice Barthélémy & Philippe Bertrand & Jean-Luc Prigent, 2019. "Mixed-asset portfolio allocation under mean-reverting asset returns," Annals of Operations Research, Springer, vol. 281(1), pages 65-98, October.
    3. Massimo Guidolin & Manuela Pedio & Milena Petrova, 2019. "The Predictability of Real Estate Excess Returns: An Out-of-Sample Economic Value Analysis," BAFFI CAREFIN Working Papers 19122, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    4. Dirk Brounen & Melissa Porras Prado & Marno Verbeek, 2010. "Real Estate in an ALM Framework: The Case of Fair Value Accounting," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(4), pages 775-804, Winter.
    5. Gregory H. MacKinnon & Ashraf Al Zaman, 2009. "Real Estate for the Long Term: The Effect of Return Predictability on Long‐Horizon Allocations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(1), pages 117-153, March.
    6. Julan Du & Charles Ka Yui Leung & Derek Chu, 2014. "Return Enhancing, Cash-rich or simply Empire-Building? An Empirical Investigation of Corporate Real Estate Holdings," International Real Estate Review, Global Social Science Institute, vol. 17(3), pages 301-357.
    7. Heinrich, Michael & Just, Tobias & Schreck, Thomas, . "Auswirkungen von Solvency II auf die Immobilienanlagen europäischer Versicherer," Beiträge zur Immobilienwirtschaft, University of Regensburg, Department of Economics, number 12.
    8. Matteo Bonato & Rangan Gupta & Christian Pierdzioch, 2020. "Do Oil-Price Shocks Predict the Realized Variance of U.S. REITs?," Working Papers 2020100, University of Pretoria, Department of Economics.
    9. Christian Rehring, 2012. "Real Estate in a Mixed‐Asset Portfolio: The Role of the Investment Horizon," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40(1), pages 65-95, March.
    10. Charles Ka Yui Leung & Edward Chi Ho Tang, 2015. "Speculating China Economic Growth through Hong Kong? Evidence from Stock Market IPOs and Real Estate Markets," International Real Estate Review, Global Social Science Institute, vol. 18(1), pages 45-87.
    11. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2007. "Investing for the Long-run in European Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 35-80, January.
    12. Martin Hoesli & Jon Lekander, 2005. "Suggested vs. Actual Institutional Allocattion to Real Estate in Europe: A Matter of Size," FAME Research Paper Series rp149, International Center for Financial Asset Management and Engineering.
    13. Yener Cos‚kun & A. Sevtap Selcuk-Kestel & Bilgi Yilmaz, 2017. "Diversification benefit and return performance of REITs using CAPM and Fama-French: Evidence from Turkey," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(4), pages 199-215, December.
    14. Jing-zhi Huang & Zhaodong Zhong, 2013. "Time Variation in Diversification Benefits of Commodity, REITs, and TIPS," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 152-192, January.
    15. Daniele Bianchi & Massimo Guidolin, 2014. "Can Linear Predictability Models Time Bull and Bear Real Estate Markets? Out-of-Sample Evidence from REIT Portfolios," The Journal of Real Estate Finance and Economics, Springer, vol. 49(1), pages 116-164, July.
    16. Christian Rehring & Steffen Sebastian, 2011. "Dynamics of commercial real estate asset markets, return volatility and the investment horizon," Journal of Property Research, Taylor & Francis Journals, vol. 28(4), pages 291-315, June.
    17. Michael Heinrich & Thomas Schreck, 2017. "Effects of Solvency II on Portfolio Efficiency, The Case of Real Estate and Infrastructure Investments," LARES lares_2017_paper_8, Latin American Real Estate Society (LARES).
    18. Tiffany Hutcheson & Graeme Newell, 2018. "Decision-making in the management of property investment by Australian superannuation funds," Australian Journal of Management, Australian School of Business, vol. 43(3), pages 404-420, August.
    19. Pawan Jain & Mark Sunderman & K. Janean Westby-Gibson, 2017. "REITs and Market Microstructure: A Comprehensive Analysis of Market Quality," Journal of Real Estate Research, American Real Estate Society, vol. 39(1), pages 65-98.
    20. Chung-Chu Liu & Jason C. H. Chen & Che-Cheong Poon, 2019. "Perception Types Of Home Buyers By Q Methodology: A Comparative Study Of Hong Kong, Taiwan, And The Usa," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(01), pages 235-257, March.

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