International Evidence on Real Estate as a Portfolio Diversifier
This paper provides an international comparison of the benefits of including real estate assets – both domestic and international – in mixed-asset portfolios. Data from seven countries on three continents are considered for a common time period (1987-2001) to facilitate comparisons. Real estate returns are desmoothed using a variant of the Geltner (1993) approach, and Bayes-Stein estimators are used to increase the stability of portfolio weight estimations. Both unhedged and hedged analyses are conducted. Real estate is found to be an effective portfolio diversifier, and even more so when both domestic and international real estate assets are considered. The optimal allocation to real estate is in the 15 to 25% range, and remains remarkably constant in the various analyses. The breakdown of the real estate allocation between domestic and non-domestic assets, however, is found to vary substantially across countries and depending on whether returns are hedged or not.
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