Real Estate Asset Allocation

What Is Real Estate?
October 2015

All forms of commercial real estate investment are underpinned by a stock of physical assets — worth an estimated seven trillion dollars — which provides elements of bond-like income with equity-like capital growth. However, real estate is a broad asset class and there are numerous ways of accessing it, through both public and private markets. From direct ownership of assets to buying shares in listed or unlisted securitized vehicles, from ETFs to derivatives, the opportunity set is wide-ranging. This diversity leads to sometimes conflicting views of real estate as an asset class. This research paper helps explain some of the idiosyncrasies of different forms of real estate investment, while demonstrating how accounting for structural and measurement issues can provide a more consistent view of the asset class.

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Investment Consultant: REITs Are Real Estate
Sean Ruhmann – NEPC
August 2015

In this NAREIT Podcast, Sean Ruhmann, director of real assets research for Boston-based investment consulting firm NEPC, analysed the benefits of REIT investment for institutional investors. NEPC published a paper earlier this year on the investment attributes of REIT stocks. NEPC’s researchers concluded that REITs behave like core real estate investment. Ruhmann noted that, as is the case with direct real estate investment, REIT investors need to have long-term time horizons.

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Examining The Performance Of Commercial Property In Changing Economic Conditions
David M Higgins And Wejendra Reddy School Of Property, Construction And Project Management
RMIT University
July 2015

An important part of Australian property investment analysis is comparing financial performance against competing investment asset classes. There is a need to compare investment performance with indices and to study the impact of macro-economic factors over the economic cycle/time. Over a long 28 years quarterly data series (1985-2012) this research examines eight leading investment classes with reference to economic conditions and levels of new supply to see if desmoothed property investment performance is superior in changing market environments. The findings show the performance of the investment asset classes vary across different economic conditions with Australian equities providing the overall best annual mean return (8.3%) with a high standard deviation (18.1%). In comparison, annual mean return for Direct property was 6.3%, although this is offset by low volatility (10.4%). It appears that those asset classes linked to the equity markets (Australian and International equities, and Listed property), performed better in stable and growth economic phases. Likewise, Australian fixed interest performed well in periods of economic recession. Overall, the performance range of the asset classes narrowed during periods of economic growth with the exception of Direct property where underlying property characteristics (new supply), separate from economic conditions, can impact Direct property performance.

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Real Estate As A Major Asset Class
David Funk – Baker Program In Real Estate At Cornell University
May 2015

In this NAREIT Podcast, David Funk, director of the Baker Program in Real Estate at Cornell University, discussed his recent paper on elevating real estate to a fourth permanent asset class for institutional investors to join equities, fixed-income and cash. Funk said an analysis of institutional investors’ portfolios found that they target roughly 10 percent of their holdings to real estate. This has been a steady increase over the last 25 years,” Funk observed. “That really argues that real estate has made it as the fourth mature asset class within institutional portfolios.”

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Risk Management: Looking Through The Label
IPE Real Estate
September/October 2014

Over-reliance on geographic, sector and style labels and an emphasis on volatility of total returns could be misleading investors. Matthew Richardson explains.

The traditional approaches to decision-making in direct real estate could arguably be improved. Two problems in particular are worth noting:

  • There is over-reliance on geographic, sector and style labels; such labels, while useful in many ways, can mislead because they fail to capture the true risk of real estate assets;
  • Too much emphasis is placed on the volatility of total returns; total returns data mask the marked difference between the volatility of income returns and capital returns.

Better results are obtainable by looking through sector, geographic and style labels at the underlying cash flows, although this is more challenging. The difference in volatility of income returns and capital returns merits far greater attention.

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Risk Management: Differences In Class
IPE Real Estate
September/October 2014

Despite their different characteristics, new research has found little differentiation between the long-term performance of value-added and opportunistic funds.

Some investors in closed-end real estate private equity funds use fund class labels – core, value-added and opportunistic – to help construct portfolios. Differences in fund risk can derive from investing in different property types, geographies, stages of building life and leverage, as well as the degree of fund focus in these areas and the timing of investment decisions by managers. Therefore, it is not clear how useful broad classifications of fund risk are for portfolio decisions when the variety of investment strategies is so large and their execution by managers is so critical.

Despite the fact that classes of funds differ in investment composition, they show that class has not been a reliable differentiator of performance between value-added and opportunistic funds. In their review of individual fund histories from vintages between 1980 and 2008, average performance does not differ between the two classes. This holds overall, for different periods, and for different metrics of performance. To vet funds, investors should more specifically evaluate fund strategies and management quality.

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A Guide To Real Estate Investing Strategies
Adrian Harrington
Aug 2014

Securitisation and the increased sophistication of the real estate industry have led to new ways to repackage property assets to create a broader menu of investment opportunities. However, the risk, return and liquidity attributes of these investments vary greatly. This paper provides an overview of different real estate investment strategies based on three risk-return styles (core, value-added and opportunistic) and four quadrants of real estate investing, based on whether they are equity or debt and traded in the public (listed) or private markets.

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How Asset Consultants Influence Institutional Property Allocation Decisions: An Australian Case Study
Wejendra Reddy Paper To The 19th ASRES Annual Conference: Gold Coast, Australia
July 2013

This research paper examines how eight leading Australian asset consultant firms determine the optimal property allocation view, and formulate their client property asset allocation decision-making advice process. The survey results indicate that asset consultants now play a notable part in the thought process of Australian fund managers’ property asset allocation decisions.

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The Use Of Listed Real Estate Securities In Asset Management – A Literature Review And Summary Of Current Practical Applications
Alex Moss And Andrew Baum

Investors have historically used listed real estate to achieve a number of outcomes, ranging from general exposure to the asset class to meeting specific returns characteristics such as inflation hedging and tax efficient income generation. However, following the events of the last five years, in common with other asset classes there is currently a re-assessment of the risk and return profile of listed real estate.

The purpose of this study is twofold: (i) to conduct a review of academic literature and evidence on the use and performance of listed real estate, both as a separate asset class and in multi-asset portfolios, and (ii) to examine in detail how institutions are using listed real estate to achieve their investment objectives, and the role listed real estate is playing in the new fund structures they are creating to meet investor objectives.

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Are Listed Real Estate Stocks Managed As Part Of The Real Estate Allocation?
Alex Moss And Andrew Baum
European Public Real Estate Association Research

Until now, however, there has been little work published regarding done the behavioural or institutional aspects of incorporating listed real estate into an investment strategy. To rectify this gap Moss and Baum have undertaken two pieces of research for EPRA. The first, published in March 2013 (The use of listed real estate securities in asset management), examined both the different strategies and the various fund types available to investors who are prepared to use listed real estate, citing a number of examples, and how listed real estate is or may be combined with other types of real estate and real assets. These other assets include internal and external unlisted funds (the product of the investor or a third party asset manager), derivatives, property debt, direct property, and real assets such as infrastructure and commodities in their various forms.

This second piece of work is a logical extension of the first paper, and concentrates on survey evidence examining whether or not listed real estate is managed as part of the overall institutional real estate allocation. Moss and Baum’s starting point is as follows. If there is a strong rational case for including more listed real estate in multi-asset or real estate portfolios, and if there is little evidence that this is happening, then there may be an explanation which is to do with the organizational structures or investment processes employed by investors or sub-contracting asset managers. Hence, while Moss and Baum might recognize the apparent benefits of listed real estate noted above, it is important to understand and capture the organizational processes that determine whether European investors do include listed real estate in their real estate portfolios — and, if not, why not.

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Determining The Current Optimal Allocation To Property: A Study Of Australian Fund Managers
Wejendra Reddy 18th Annual Pacific-Rim Real Estate Society Conference Adelaide, Australia
January 2012

This research paper examines the property asset allocation strategies for the A$1.7 trillion Australian managed funds industry and identifies the important steps and considerations that influence their optimal property allocation view and decision making process. The research identifies and documents the factors that aid property asset allocation decisions for Australian fund managers. It investigates the use and relevancy of Strategic Asset Allocation, Dynamic Strategic Asset Allocation and Tactical Asset Allocation strategies for property asset allocation decisions.

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The Making Of An Asset Class
Roy Hilton March
Wharton Real Estate Review


With the advent of Modern Portfolio Theory in the 1950s and its subsequent adoption by institutional investors in the 1960s to 1980s, commercial real estate went from cottage industry to bona fide asset class. But the obstacles to its ownership (including capital intensity, lack of transparency, operational requirements, geographic specificity and illiquidity) made real estate largely inaccessible to all but the largest investors. Twenty years ago, a remarkable transformation occurred: liquidity in real estate brought on by the rise of public REITs, CMBS, real estate private equity funds and the abundance of capital sources. Today, real estate competes directly with stocks, bonds, currencies, commodities and other financial assets. The evolution of the sector occurred much as evolution does in nature: life-threatening conditions forced inhabitants to adapt or perish and introduced new entrants to the ecosystem. As Charles Darwin famously observed, “It is not the strongest of the species that survives, nor the most intelligent… it is the one that is most adaptable to change.” The creative destruction of the late 1980s and early 1990s forged a new species of real estate industry—more resilient than its ancestors but, as recent years attest, still vulnerable to threats old and new. Understanding the factors that catalyzed the industry’s transformation, and the lessons learned along the way, is the key to preparing for the many exciting challenges and opportunities that lie ahead.

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How To Choose Listed Or Unlisted Commercial Property
AFR SmartInvestor
July 2010

Pooled investments via either listed or unlisted vehicles are the most direct ways to invest in commercial property, but which is better? Well, the unlisted versus listed commercial property trust contest is no cage match where two trusts enter and only one leaves. Instead, the one you pick depends on your circumstances and risk profile. The AFR SmartInvestor puts both forms of real estate investing under the spotlight.

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Real Estate As Part Of An Investment Portfolio In Australia
Richard A. Heaney |And David Higgins And Amalia Di Iorio
June 2010

Real estate is an important investment asset class for Australian retail and wholesale funds yet there are considerable problems associated with choosing the optimal allocation of real estate in a portfolio. This asset class poses considerable problems for portfolio managers because of reliance on appraisals in valuing direct real estate investment and the equity like behaviour of listed Australian real estate investment trusts (A-REITs). The focus of this paper is the analysis of direct investment in commercial real estate, direct investment in residential real estate as well as indirect investment through the ASX 300 A-REIT index using quarterly returns over the period from the 3rd quarter 1986 to the 3rd quarter 2009. Analysis is conducted on the relations that exist between the three classes of real estate investment as well as between the share market returns and real estate investment. Diversification benefits can be achieved with investment in real estate investment, particularly direct investment in residential real estate.

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