Listed Real Estate in a Multi-Asset World: Does It Add Value?

While real estate has by now become a well-established asset class among institutional investors, the vast majority of real estate investment so far has been in private rather than public markets (real estate investment trusts, i.e., REITs, or shares in real-estate companies). Against this background and amid an ongoing debate about the relative rewards of public versus private investments, this article asks how much of the historical return on global listed real estate can be explained by well-established market and alternative risk premiums. The results indicate that model-implied “excess returns” are effectively zero, suggesting that there is limited scope for public real estate to add value to an optimally structured multi-asset portfolio. However, to the extent that the design or composition of investors’ portfolios is sub-optimal—due to such institutional or legal constraints as prohibition of leverage, shorting, or exclusions of some categories of stocks—allocating to REITs might improve Sharpe ratios, especially when investors can deploy skill and competitive edge in selecting REITs.