Since the financial crisis, many investors have dismissed real estate as a worthwhile asset class. A recent article in Barron’s sheds light on some data that suggests those investors should reconsider their approach.
Real estate can play a crucial and dynamic role in multi-asset portfolios:
“Not only can it operate as a proxy for direct real estate while generating diversified returns – with a stronger income component arising from high dividends – it can also provide some protection against rising interest rates, which may come as a surprise to some.
Evidence shows that, over the long term, investment in listed real estate offers an exposure to direct real estate (including real estate physical property investments and unlisted funds) while addressing the well-known illiquidity problems associated with owning a portfolio of individual buildings. The advantages in terms of liquidity are particularly important because of the potential it offers to exploit, through active management, the inefficiencies that exist among countries, markets and sub-sectors.”
When we use robust optimization techniques, we see that listed real estate within a multi-asset porfolio offers diversification against uncertainty—in both return forecasts as well as variance-covariance forecasts.