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Andrew Baum and David Hartzell, Global Property Investment, 2011 The optimal portfolio? UK, Return (%)Risk (%)CV Equities Gilts Property Source:IPD, PFR 2011 Returns are geometric means, annual data CV = coefficient of variation
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Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011
Real estate as an asset class
Andrew Baum and David Hartzell, Global Property Investment, 2011
Andrew Baum and David Hartzell, Global Property Investment, 2011
What makes real estate attractive?
• It offers a reasonable return• It offers low volatility • It diversifies the portfolio • It offers an inflation hedge• Markets are inefficient
Andrew Baum and David Hartzell, Global Property Investment, 2011
The optimal portfolio? UK, 1971-2010
Return (%) Risk (%) CV Equities 16.2 29.8 0.54Gilts 10.9 13.3 0.82Property 11.5 11.5 1.00
Source: IPD, PFR 2011Returns are geometric means, annual dataCV = coefficient of variation
Andrew Baum and David Hartzell, Global Property Investment, 2011
The optimal portfolio? US, 1979-2010
Return (%) Risk (%) CV Equities 13.1 17.3 0.76Treasuries 8.2 9.9 0.83Property 8.9 9.2 0.97
Source: NCREIF, S&P, Barclays Capital 2011Returns are geometric means, annual dataCV = coefficient of variation
Andrew Baum and David Hartzell, Global Property Investment, 2011
The optimal portfolio? Correlations, UK, 1971-2010
Equities Gilts Property Equities 1 - - Gilts 0.57 1 - Property 0.28 -0.22 1
Andrew Baum and David Hartzell, Global Property Investment, 2011
The optimal portfolio? Correlations, US, 1979-2010
Equities Treasuries Property Equities 1 - - Treasuries -0.03 1 - Property 0.15 0.30 1
Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011
Diversification? UK, 1971-2010
1971
19
73
1975
19
77
1979
19
81
1983
19
85
1987
19
89
1990
19
92
1994
19
96
1998
20
00
2002
20
04
2006
20
08
2010
-100.0
-50.0
0.0
50.0
100.0
150.0
200.0
PropertyEquitiesBonds
Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011
Diversification? US, 1979-2010
19791980
19811982
19831984
19851986
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
PropertyEquitiesBonds
Andrew Baum and David Hartzell, Global Property Investment, 2011Andrew Baum and David Hartzell, Global Property Investment, 2011
Diversification? UK, 1990-2010
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
PropertyEquitiesBonds
Andrew Baum and David Hartzell, Global Property Investment, 2011
The optimal portfolio? Return and risk, 1990-2009
Asset class Return Risk
UK stocks 15.9 30.5
UK gilts 11.4 14.1
UK property 11.7 11.7
Andrew Baum and David Hartzell, Global Property Investment, 2011
The optimal portfolio? Correlations, 1990-2009
UK property UK stocks UK gilts
UK property 1 0.29 0.05
UK stocks 0.29 1 0.59
UK gilts 0.05 0.59 1
Andrew Baum and David Hartzell, Global Property Investment, 2011
The optimal portfolio?
• A low risk portfolio – 11.5% return• A medium risk/return portfolio – 13% return• A high return portfolio – 14.5% return
• Limitations?
Andrew Baum and David Hartzell, Global Property Investment, 2011
The optimal portfolio?
Portfolio return
Standard deviation UK property UK stocks UK gilts
0.115 0.092 0.597 0.000 0.403
0.130 0.140 0.615 0.315 0.070
0.145 0.224 0.345 0.655 0.000
Andrew Baum and David Hartzell, Global Property Investment, 2011
Limitations?
0%
10%
20%
30%
40%
50%
60%
70%
11.5% 13.0% 14.5%
UK stocks UK property UK gilts
Observedmean
Andrew Baum and David Hartzell, Global Property Investment, 2011
Limitations?
Efficient frontier
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0% 5% 10%
15%
20%
25%
30%
35%
Standard deviation
Return
100% equities
60% property40% gilts
Andrew Baum and David Hartzell, Global Property Investment, 2011
Limitations?
0%
20%
40%
60%
80%
100%
11.4%
11.4%
11.4%
11.6%
11.8%
12.1%
12.3%
12.6%
12.8%
13.1%
13.3%
13.6%
Expected portfolio return
Allocation
Gilts
Property
Equities
Andrew Baum and David Hartzell, Global Property Investment, 2011
Limitations
• Smoothing• Specific risk and sampling error
– – can you buy the index?• Leverage• Illiquidity• Fees• Execution challenges
