Constructing smart portfolios is the key goal of every investor regardless of the risk aversion. Accessible investments for investors are for instance stocks, bonds, treasury bills,
and real estate. According to Seiler, Webb, and Myer (1999, p. 163) “real estate asset management has been and will continue to be a topic of great interest”. In the year 1971 U.S. public real estate had a total market capitalization of US$1.4bn, while in 2006 public real estate had a market capitalization of US$438bn (National Association of Real Estate Investment Trusts [NAREIT], 2007, p. 1). The U.S. private real estate index has more than
tripled from US$84bn in market value in the first quarter of 2001 to US$266m in the first quarter of 2007 (National Council of Real Estate Investment Fiduciaries [NCREIF],2007, p. 1. It is obvious that the real estate market has been growing incredibly and real
estate has became more and more important as an investment opportunity. However, all available data on ownership of real estate show that pension funds hold 3.5% to 4.0% of
their total assets in real estate (Chiochetti, SA-AADU, & Shilling, 1999, p. 193). Optimal allocation seems to
be a problem. Another point is that some degree of diversification can be achieved without real estate. So why should investors hold real estate in their portfolios? Does real estate outperform stock and bond returns? What risks are linked with real estate investments? The aim of this paper is to provide the reader with a deep insight into the real estate investment discussion and to present the advantages and disadvantages of real estate in a mixed-asset portfolio. In a nutshell, at the end of this paper the reader should be able to decide, whether real estate investment is justifiable or not.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Problem Definition and Objectives
- Course of the Investigation
- Theoretical Fundamentals
- Portfolio Fundamentals
- Definition of Real Estate
- Real Estate Investment Discussion
- Risk and Return
- Direct Real Estate
- Real Estate Investment Trusts (REITs)
- Diversification in a Mixed-Asset Portfolio
- Direct Real Estate
- Real Estate Investment Trusts (REITs)
- Real Estate as Inflation Hedge
- Disadvantages of Real Estate Investment
- Optimal Allocation
- Summary and Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to provide a detailed analysis of real estate within the context of asset allocation. It explores the advantages and disadvantages of incorporating real estate into a diversified investment portfolio, examining its risk-return profile and its role as an inflation hedge. The paper also investigates the optimal allocation of assets, considering the unique characteristics of the real estate market.
- Optimal asset allocation strategies including real estate
- Risk and return characteristics of real estate investments
- Real estate's role as a diversifier in investment portfolios
- The impact of market imperfections on real estate investment decisions
- Comparison of direct real estate investment with REITs
Zusammenfassung der Kapitel (Chapter Summaries)
Introduction: This chapter introduces the central problem of determining the optimal allocation of real estate within an investment portfolio. It highlights the significant growth of the real estate market and the discrepancy between existing real estate holdings by pension funds (3.5-4%) and suggested optimal allocations (9-80%) proposed by various researchers. The chapter emphasizes the unique characteristics of real estate, contrasting it with assets like stocks and bonds, and underscores the importance of considering factors beyond traditional risk measures such as marketability and transaction costs.
Theoretical Fundamentals: This section lays the groundwork for the subsequent analysis by reviewing portfolio theory fundamentals and providing a precise definition of real estate as an asset class. It sets the stage for the detailed discussion of real estate investment strategies and their implications for portfolio construction and risk management. The foundational concepts presented here will be crucial in understanding the subsequent analysis of risk, return, and diversification within the context of real estate.
Real Estate Investment Discussion: This chapter delves into the core of the paper, exploring the risk and return profiles of direct real estate investment and REITs. It analyzes the role of real estate in achieving portfolio diversification and its potential as an inflation hedge. A critical discussion of the disadvantages inherent in real estate investment is also included, providing a balanced overview of the asset class's strengths and weaknesses. The chapter utilizes data and research from various sources to support its arguments, providing a thorough and nuanced perspective.
Schlüsselwörter (Keywords)
Real estate, asset allocation, portfolio diversification, risk and return, REITs, inflation hedge, optimal portfolio, market imperfections, CAPM, APT.
Frequently Asked Questions: A Comprehensive Language Preview on Real Estate Asset Allocation
What is the purpose of this document?
This document provides a comprehensive preview of a paper analyzing real estate within the context of asset allocation. It covers the objectives, key themes, chapter summaries, and keywords, offering a structured overview of the research.
What are the main topics covered in the paper?
The paper examines the advantages and disadvantages of including real estate in a diversified investment portfolio. It explores the risk-return profile of real estate investments, its role as an inflation hedge, and strategies for optimal asset allocation, considering the unique characteristics of the real estate market. The comparison of direct real estate investment with REITs (Real Estate Investment Trusts) is also a key focus.
What are the key objectives of the research?
The research aims to provide a detailed analysis of real estate's place in asset allocation. Specific objectives include determining optimal asset allocation strategies that include real estate, analyzing the risk and return characteristics of real estate investments, evaluating real estate's role as a portfolio diversifier, assessing the impact of market imperfections on investment decisions, and comparing direct real estate investment with REITs.
What are the key themes explored in the paper?
Key themes revolve around optimal asset allocation strategies, including real estate; the risk and return characteristics of real estate investments; real estate's role in portfolio diversification; the influence of market imperfections on real estate investment decisions; and a comparative analysis of direct real estate investment versus REITs.
What is covered in the Introduction chapter?
The introduction defines the central problem of determining the optimal allocation of real estate in an investment portfolio. It highlights the significant growth of the real estate market, the discrepancy between current pension fund holdings and suggested optimal allocations by researchers, and the unique characteristics of real estate compared to stocks and bonds. The importance of considering factors beyond traditional risk measures (like marketability and transaction costs) is also emphasized.
What is discussed in the Theoretical Fundamentals chapter?
This chapter reviews fundamental portfolio theory and provides a precise definition of real estate as an asset class. It lays the groundwork for understanding subsequent discussions of investment strategies, portfolio construction, and risk management. The chapter establishes foundational concepts crucial for analyzing risk, return, and diversification in relation to real estate.
What does the Real Estate Investment Discussion chapter cover?
This chapter explores the risk and return profiles of both direct real estate investment and REITs. It analyzes real estate's role in portfolio diversification and its potential as an inflation hedge. A critical assessment of the disadvantages of real estate investment is included, offering a balanced perspective. The chapter supports its arguments using data and research from various sources.
What are the key words associated with this research?
Key words include real estate, asset allocation, portfolio diversification, risk and return, REITs, inflation hedge, optimal portfolio, market imperfections, CAPM, and APT.
What is the structure of the document?
The document is structured to provide a preview, including a table of contents, objectives and key themes, chapter summaries, and keywords. This allows for a clear understanding of the paper's scope and content before reading the full text.
- Quote paper
- BSc Waldemar Maurer (Author), 2007, Real Estate Within the Asset Allocation Mix, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/134888
