Residential Real Estate in a Mixed-Asset Portfolio

Abstract

Mixed-asset portfolio optimization consists in determining the best allocation amongstandard financial assets such as money market accounts, bonds, stocks and realestate asset as well. For this latter kind of asset, computing the optimal weight canbe challenging. First, there is the need to specify the kind of real estate included in theportfolio (commercial, industrial, residential, direct, REIT shares). Second, the pricesused to calibrate real estate values need to be chosen from alternatives like: appraisalvalues, actual real estate transactions, repeated sales, indices. In this paper we focuson private residential real estate returns, investigating the optimal weight of thereal asset with respect to standard financial assets. Using quarterly data on housingindices for four European countries, France, Germany, UK and Spain, we address thequestion of how investing in housing affects the composition of an investor’s portfolio. We show in particular under which conditions we recover the typical 15%-20%real asset allocation.