Real Estate in a Balanced Portfolio
Research Paper, August 2005

This paper examines the various types of investment vehicles within the real estate asset class and some of their unique characteristics. All real estate investments involve owning a property or lending to a property owner. As an owner, real estate companies earn returns on net rental income generated from the property and/or appreciation in the price of the property above the original purchase cost. As a lender, real estate companies earn returns by financing the purchases of real estate owners. This paper will focus primarily on the aspects of ownership of real estate as an asset class. We will quantitatively show the strategic diversification benefits that investing in real estate brings to a traditionally balanced portfolio and examine the historical performance characteristics of both the public and private side of the asset class.

In the public arena, Real Estate Investment Trusts (REITs )have been one of the top performing investments for the last five years. While some diversification benefits are evident from a strategic perspective, now may not be the most appropriate tactical point to invest in the REIT market. Private real estate allocations have also performed well during the last five years, but generally not as well as the REIT market. Private real estate investment structures are more complex than buying a REIT on the stock exchange, and each deal requires a more detailed analysis of the risk/return aspects of the investment. That said, the private real estate asset class has historically provided significant cash flows and diversification benefits to a portfolio.

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