Summary
This study constructs sixteen mean-variance optimal portfolios of private real estate using returns from the United States and the United Kingdom. First, the analysis uses total returns by property type (retail, office, and industrial). Second, the returns are separated into their two components: returns from income and returns from appreciation. Third, optimal portfolios are constructed by type of return and again by property type. Finally, all returns are considered together. Several non-obvious and non-trivial results emerge. For example, the high risk portfolios using total returns are 100% U.K. for all three property types and when the three property types are combined, offices, generally regarded as the most popular type of institutional real estate investment, never enter the optimal portfolio for either the U.S. or the U.K.
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Extract
Optimal Diversification in U.S./U.K. Private Real Estate Only Portfolios: The Good, the Bad, and the Uncertain
International real estate investment opportunities are a goal of many institutional investors with direct investment into real estate considered to provide diversification benefits, notably in large institutional portfolios (Hoesli, MacGregor, Adair, and McGreal, 2002). Most of the research on the theme has tended to focus on the role of real estate in mixed-asset portfolios and the ability to achieve diversification benefits using historic returns, risk, and correlations between asset classes (Gyourko and Linneman, 1990). In this study, the focus is on direct real estate only. The study constructs meanvariance optimal portfolios for the United States and the United Kingdom focusing on allocation by asset class across low, medium, and high-risk/return real ...
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