Real estate in the mixed‐asset portfolio: the question of consistency
| Pages | 123-135 |
| Date | 01 March 2006 |
| DOI | https://doi.org/10.1108/14635780610655085 |
| Published date | 01 March 2006 |
| Author | Stephen Lee,Simon Stevenson |
| Subject Matter | Property management & built environment |
Real estate in the mixed-asset
portfolio: the question of
consistency
Stephen Lee
Centre for Real Estate Research (CRER),
The University of Reading Business School, Reading, UK, and
Simon Stevenson
Faculty of Finance, Cass Business School, City University, London, UK
Abstract
Purpose – This paper seeks to address the question of consistency, regarding the allocation of real
estate in the mixed-asset portfolio.
Design/methodology/approach – To address the question of consistency the allocation of real
estate in the mixed-asset portfolio was calculated over different holding periods varying from five to
25 years. For each portfolio and holding period, the percentage of portfolios with real estate was
computed, as was the average real estate allocation in the optimum solution. Then, the risk and return
differences between the two efficient frontiers, with and without real estate, were calculated to estimate
real estate’s marginal impact on portfolio performance.
Findings – First, the results suggest strongly that real estate has possessed the attribute of
consistency in optimised portfolios. Second, the benefits from including real estate in the mixed-asset
portfolio tend to increase as the investment horizon is extended. Third, the position of real estate
changes across the efficient frontier from its return enhancing ability to its risk-reducing facility.
Finally, the results show that the gain in return from adding real estate to the mixed-asset portfolio is
typically less compared with the reduction in portfolio risk.
Practical implications – The results highlight a number of issues in relation to the role of direct
real estate within a mixed-asset framework. In particular, the rationale behind the inclusion of real
estate in the mixed-asset portfolio depends on the length of the holding period of the investor and their
position on the efficient frontier.
Originality/value – The study examines the attractiveness of direct real estate in the context of
mixed-asset portfolio.
Keywords Real estate, Portfolio investment
Paper type Research paper
1. Introduction
The recent poor performance of the equity market in the UK has meant that real
estate is increasingly been seen as an attractive addition to the mixed-asset
portfolio. However, investors might question whether the performance of real estate
will remain competitive with other assets over varying time periods. For instance,
the relatively good returns of real estate in the UK during the 1970s, mainly as a
result of the high levels of inflation, were lost in the 1980s. Thus, determining
whether the good return enjoyed by real estate is a temporary or long-term
The current issue and full text archive of this journal is available at
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The mixed-asset
portfolio
123
Received August 2004
Accepted February 2005
Journal of Property Investment &
Finance
Vol. 24 No. 2, 2006
pp. 123-135
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780610655085
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