Why Real Estate?

Abstract

In the beginning real estate was regarded as a diversifier, bolstered by the Employee Retirement Security Act of 1974. However, given real estate's nature as a debt-equity hybrid and the emergence of new ways to invest in real estate markets, it is clear that there could be additional motivations for choosing to include real estate in a mixed asset portfolio. This article explores 5 possible uses for real estate: to reduce overall portfolio risk, to achieve high absolute returns, to hedge unexpected inflation or deflation, to reflect the overall investment universe and/or to deliver strong cash flows to the investor. But first we must re-define real estate to encompass the new public debt and equity markets that have joined the traditional private debt and equity markets for real estate. A new index of overall real estate performance is presented. The article concludes by considering the types of investors who might see a role for real estate; several classes of investor would likely benefit from the inclusion of real estate in their investment portfolio.