Optimal Diversification in U.S./U.K. Private Real Estate Only Portfolios: The Good, the Bad, and the Uncertain

Abstract

Executive Summary. This study constructs sixteenmean-variance optimal portfolios of private real estateusing returns from the United States and the UnitedKingdom. First, the analysis uses total returns by propertytype (retail, office, and industrial). Second, the returnsare separated into their two components: returnsfrom income and returns from appreciation. Third, optimalportfolios are constructed by type of return andagain by property type. Finally, all returns are consideredtogether. Several non-obvious and non-trivial resultsemerge. For example, the high risk portfolios usingtotal returns are 100% U.K. for all three property typesand when the three property types are combined, offices,generally regarded as the most popular type of institutionalreal estate investment, never enter the optimalportfolio for either the U.S. or the U.K.