Rule-Based Asset Allocation Strategies in Real Estate Portfolios

There is an extensive literature on persistence and mean reversion equity prices and returns, and whether or not these tendencies are strong enough to yield excess returns to portfolios based on technical trading rules. Despite the strong evidence of persistence in direct property returns at the segment level, the effectiveness of such strategies for property investors has not been thoroughly investigated. The paper presents results of simulated momentum and contrarian (buy winner or buy loser) investment strategies in UK property, using annual and monthly returns series. A variety of periods over which winner and loser segments are identified, and frequencies of portfolio reweighting, are tested. The results show strong potential gains from momentum strategies based on preceding returns over a three to twelve month period. Contrarian strategies, by contrast, perform relatively poorly. Whether these gains are attainable to real world investors depends on assumptions on transactions costs and profits. Transactions costs at the current full UK level of 7.5% for combined purchase and sale a high enough to outweigh the potential gains from any of the strategies.