IDEAS home Printed from https://ideas.repec.org/a/taf/jpropr/v34y2017i3p181-210.html
   My bibliography  Save this article

The 4% rule: Does real estate make a difference?

Author

Listed:
  • Eli Beracha
  • David H. Downs
  • Greg MacKinnon

Abstract

This paper examines the wealth maximisation and preservation effects of including commercial real estate in retirement-phase portfolio management. Prior research addresses the role of real estate during the wealth-accumulation phase of the investor lifecycle; however, little is known about the contribution of real estate during the invest-and-spend, or decumulation, phase. To address this issue, we estimate short-fall risk based on the widely known 4% Rule. We use pricing data for multiple asset classes and simulation techniques, combined with a robust correlation structure, to examine: short-fall risk sensitivity to alternative spending rules; the impact of public vs. private real estate allocations; wealth preservation as an investment objective; and the effect of real estate on upside, or wealth maximisation, potential. We find short-fall risk in a decumulation portfolio decreases with substantial allocations to real estate. This result holds for a portfolio including either public or private real estate. Additionally, and under most conditions, the best performing decumulation-phase portfolios include a real estate allocation with both public and private real estate exposure. These results have significant implications for investors, whether they be retirees, plan administrators or endowments, as well as financial economists studying the lifecycle of investment decisions.

Suggested Citation

  • Eli Beracha & David H. Downs & Greg MacKinnon, 2017. "The 4% rule: Does real estate make a difference?," Journal of Property Research, Taylor & Francis Journals, vol. 34(3), pages 181-210, July.
    • Handle: RePEc:taf:jpropr:v:34:y:2017:i:3:p:181-210
    DOI: 10.1080/09599916.2017.1293134
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/09599916.2017.1293134
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09599916.2017.1293134?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thomas Davidoff, 2015. "Can "High Costs" Justify Weak Demand for the Home Equity Conversion Mortgage?," The Review of Financial Studies, Society for Financial Studies, vol. 28(8), pages 2364-2398.
    2. 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.
    3. 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.
    4. Jason Scott & John Watson, 2013. "The Floor-Leverage Rule for Retirement," Discussion Papers 13-013, Stanford Institute for Economic Policy Research.
    5. Christian Weistroffer & Steffen Sebastian, 2015. "The German Open-End Fund Crisis – A Valuation Problem?," The Journal of Real Estate Finance and Economics, Springer, vol. 50(4), pages 517-548, May.
    6. David H. Downs & Steffen Sebastian & Christian Weistroffer & René-Ojas Woltering, 2016. "Real Estate Fund Flows and the Flow-Performance Relationship," The Journal of Real Estate Finance and Economics, Springer, vol. 52(4), pages 347-382, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Philipp Gerlach & Raimond Maurer, 2020. "The Growing Importance of Secondary Market Activities for Open-end Real Estate Fund Shares in Germany," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 72(1), pages 65-106, February.
    2. Sebastian Schnejdar & Michael Heinrich & René-Ojas Woltering & Steffen Sebastian, 2017. "The Discount to NAV of distressed German open-ended real estate funds," ERES eres2017_160, European Real Estate Society (ERES).
    3. Sebastian Schnejdar & Michael Heinrich & René-Ojas Woltering & Steffen Sebastian, 2020. "The Discount to NAV of Distressed Open-End Real Estate Funds," The Journal of Real Estate Finance and Economics, Springer, vol. 61(1), pages 80-114, June.
    4. John Y. Campbell, 2016. "Restoring Rational Choice: The Challenge of Consumer Financial Regulation," American Economic Review, American Economic Association, vol. 106(5), pages 1-30, May.
    5. repec:dau:papers:123456789/9296 is not listed on IDEAS
    6. Zhu Bing, 2018. "The Time-Varying Nature of Reits," Real Estate Management and Valuation, Sciendo, vol. 26(1), pages 26-38, March.
    7. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    8. Marie Brière & Ombretta Signori, 2011. "Inflation hedging portfolios in different regimes," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 139-163, Bank for International Settlements.
    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. 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.
    11. Ciccone, Julien & Marchiori, Luca & Morhs, Romuald, 2022. "The flow-performance relationship of global investment funds," Journal of International Money and Finance, Elsevier, vol. 127(C).
    12. Massimo Guidolin & Manuela Pedio & Milena T. Petrova, 2023. "The Predictability of Real Estate Excess Returns: An Out-of-Sample Economic Value Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 67(1), pages 108-149, July.
    13. Molitor, Philippe & Doyle, Nicola & Hermans, Lieven & Weistroffer, Christian, 2016. "Shadow banking in the euro area: risks and vulnerabilities in the investment fund sector," Occasional Paper Series 174, European Central Bank.
    14. Amédée-Manesme, Charles-Olivier & Barthélémy, Fabrice & Prigent, Jean-Luc, 2016. "Real estate investment: Market volatility and optimal holding period under risk aversion," Economic Modelling, Elsevier, vol. 58(C), pages 543-555.
    15. Jeon, Junkee & Park, Kyunghyun, 2020. "Dynamic asset allocation with consumption ratcheting post retirement," Applied Mathematics and Computation, Elsevier, vol. 385(C).
    16. Aekkachai NITTAYAGASETWAT & Jiroj BURANASIRI, 2016. "Performance Comparison Between Real Estate Securities and Real Estate Investment Using Stochastic Dominance and Mean-Variance Analysis," International Conference on Economic Sciences and Business Administration, Spiru Haret University, vol. 3(1), pages 208-219, October.
    17. Hyung-Suk Choi, 2019. "A Numerical Analysis to Study Whether the Early Termination of Reverse Mortgages is Rational," Sustainability, MDPI, vol. 11(23), pages 1-10, December.
    18. Munnell, Alicia H. & Walters, Abigail N. & Belbase, Anek & Hou, Wenliang, 2020. "Are homeownership patterns stable enough to tap home equity?," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
    19. Hoevenaars, Roy P.M.M. & Molenaar, Roderick D.J. & Schotman, Peter C. & Steenkamp, Tom B.M., 2008. "Strategic asset allocation with liabilities: Beyond stocks and bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2939-2970, September.
    20. Giorgio Bellettini & Filippo Taddei, 2009. "Real Estate Prices and the Importance of Bequest Taxation," Carlo Alberto Notebooks 107, Collegio Carlo Alberto, revised 2011.
    21. Carole Bernard & Adam Kolkiewicz & Junsen Tang, 2023. "Valuation of Reverse Mortgages with Default Risk Models," The Journal of Real Estate Finance and Economics, Springer, vol. 66(4), pages 806-839, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:jpropr:v:34:y:2017:i:3:p:181-210. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RJPR20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.