Real estate in mixed-asset portfolios for various investment horizons

In this article, the authors investigate the role of real estate in a mixed-asset portfolio for various investment horizons and notably extend the literature by considering together direct real estate, real estate investment trusts (REITs), and nonlisted real estate funds, as well as other alternative investments. Using US data spanning almost three decades, they report that medium- to long-term investors should allocate 10% to 20% of their portfolio to direct real estate. In contrast, short-term investors should focus on open-end core funds, which are found to be good substitutes for direct investments. REITs are usually of limited interest as a substitute for direct real estate, but they could be used in conjunction with direct investments for medium- and long-term horizons. Value-added and opportunistic closedend funds are found to be imperfect substitutes for direct investments and are only marginally used. Finally, the authors find that including commodities, private equity, and hedge funds in a portfolio enhances the portfolio’s performance but the allocation to real estate barely changes.