Reexamining the Real Estate Quadrants

Abstract

The real estate quadrant approach for categorizing the real estate investment universe is now 20 years old. These investment conduits have developed significantly over this time, and real estate allocations are shaped by both market and regulatory forces, which are leading investors to reexamine the broadening of blended strategies across these quadrants. In this article, the performance and interrelationships between the quadrants and the way that these have evolved over time are examined. The results show that significant diversification benefits are available to investors using the quadrants. The commercial mortgage-backed securities market is found to be the main transmitter of shocks among the quadrants and private real estate the most significant receiver, with a meaningful shift in their relationships before and after the global financial crisis. Finally, blended real estate portfolios are found to reduce estimated risk and enhance the risk-adjusted performance of a purely private real estate exposure.

Key Findings

• ▪ Significant diversification benefits are available to investors using all forms of real estate exposure, given our finding that less than one-third of the system is influenced by itself in isolation.

• ▪ Using the dynamic connectedness methodology, the study finds that public real estate debt is the main transmitter of shocks among the quadrants and that private real estate equity is the most significant receiver of shocks among the real estate quadrants.

• ▪ Further evidence of blended real estate portfolios enhance the risk-adjusted performance of a purely private real estate exposure.