The Role of International Real Estate in Global Mixed-Asset Investment Portfolios

Abstract

Executive Summary. Many studies have advocated the inclusion of real estate in mixed-asset investment portfolios. However, the majority of past studies have focused on the role of domestic real estate in domestic mixed-asset portfolios. This study goes further by considering whether the inclusion of international real estate would enhance the risk-return characteristics of an internationally diversified investment portfolio that already invests in bonds, cash, equities and gold. The study also corrects for the higher taxes, transaction costs and asset management fees incurred when investing in real estate vis-à-vis the other asset classes, as well as the impact of appraisal-smoothing on reported real estate returns. Using mean-variance portfolio optimization, the study concludes that, even after these corrections, international real estate does have a viable role to play in global mixed-asset investment portfolios.