Real Estate as Part of an Investment Portfolio in Australia

Abstract

Real estate is an important investment asset class for Australian retail and wholesale funds yet there are considerable problems associated with choosing the optimal allocation of real estate in a portfolio. This asset class poses considerable problems for portfolio managers because of reliance on appraisals in valuing direct real estate investment and the equity like behaviour of listed Australian real estate investment trusts (A-REITs). The focus of this paper is the analysis of direct investment in commercial real estate, direct investment in residential real estate as well as indirect investment through the ASX 300 A-REIT index using quarterly returns over the period from the 3rd quarter 1986 to the 3rd quarter 2009. Analysis is conducted on the relations that exist between the three classes of real estate investment as well as between the share market returns and real estate investment. Diversification benefits can be achieved with investment in real estate investment, particularly direct investment in residential real estate.