Real estate portfolio construction
for a multi-asset portfolio
Jon R.G.M. Lekander
Department of Real Estate and Construction Management,
Royal Institute of Technology, Stockholm, Sweden
Purpose –The purpose of this paper is to explore how tenant end demand dependence and investment
market segmentation, as estimated through sector type, impacts real estate portfolio strategy in the context
of the multi-asset portfolio.
Design/methodology/approach –The analysis is performed for six investor domeciles, for
domestic and international investments over several cycles. The analysis is performed in a mean
Findings –The findings are consistent with the hypothesis that an investor benefits from investing in
real estate assets where end demand is dependent on local factors rather than global factors.
Practical implications –The efficiency of the overall multi-asset portfolio benefits from a deeper
understanding of how the real estate portfolio is constructed. Locally dependent real estate, i.e. real
estate that is dependent on local economic factors, tends to better support the overall portfolio than do
real estate that is dependent upon global factors.
Originality/value –The paper contributes to the broader knowledge through extending earlier
studies using similar methodology by extending the data series to cover the impact of the latest global
financial crises, as well through extending the knowledge how the real estate portfolio should be
constructed to better support the overall objectives of the multi-asset portfolio.
Keywords Asset allocation, Real estate, Globally dependent real estate, Locally dependent real estate,
Real estate portfolio construction, Sector strateg y
Paper type Research paper
The controversy over the role of real estate in the context of asset allocation in
institutional portfolios continues to attract a great deal of interest. There is an implicit
consensus that real estate plays a role in asset allocation, but there is a divergence of
opinion on what that allocation is and its purpose. There is also a diverg ence on how
various costs, such as illiquidity, information asymmetries and management affect the
attractiveness of the asset class. This discussion will continue, which will foster an
improved understanding of the complexities of the asset class.
As the research of real estate contribution typically uses real estate market indices,
it is implicitly assumed that investors hold market portfolios. Little research has been
conducted on how the real estate portfolio should be constructed to support the overall
objective of a multi-asset portfolio. The goal here is to investigate the sub-problem of
formulating an efficient real estate strategy that best supports the portfolio’s overall
objective. The rationale for investigation is that certain types of real estate are more
subject to local factors, whereas other types are more subject to global factors.
The analysis builds on and extends that of Hoesli et al. (2004) but broadens the
length of the time series and the depth of analysis as they pertain to the real estate
portfolio. The purpose is to investigate how the composition of a real estate portfolio
affects the ability to achieve risk diversification when management costs are taken into
account and after removing the assumption that investors can only buy a rea l estate
Journal of Property Investment &
Vol. 33 No. 6, 2015
©Emerald Group Publishing Limited
Received 8 February 2015
Revised 5 July 2015
Accepted 6 July 2015
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