Why Include Real Estate and Especially REITs in Multi-asset Portfolios?

Elias Wiklund & Joachim Hansen Flood

Student thesis: Master thesis


This thesis has explored the characteristics of real estate as a financial asset in regards to portfolio building, with a particular focus on REITs. This was done to clarify if real estate should be included in large-cap investors’ portfolios, and when that is the case, what allocation.
Extensive qualitative analysis has been performed, mainly examining existing research in both the field of real estate and portfolio theory. The financial implications of investing in REITs versus buying properties the traditional way (direct) has been explored, as has the macroeconomic implications for different real estate segments.
The asset allocations of the most prominent large-cap investors have been assessed. Not surprisingly, all the largest asset managers have allocated some funds to real estate. An unexpected finding was how dissimilar the asset managers’ portfolios were, despite having the same goal of growing the capital they are managing for investors. The disagreement within the asset management industry indicates that further research on the field has relevance.
Quantitative analyses of the U.S.public stock- and bondmarkets have been conducted, where returns, volatility, and correlations were examined. Based on this, historical tangency portfolios were found, demonstrating what weight of real estate in combination with other asset classes has yielded the best risk-adjusted returns in the past. The analysis used data from 1994 until 2020, making it evident that over different historical periods, different allocations to REITs, stocks, and bonds were optimal. However, the spread was not too substantial: Using data from the last20-years, a 14% allocation to REITs generated the maximum risk-adjusted return, while considering the last five years the optimal allocation to REITs was 15%.
The thesis has investigated the effects of the ongoing COVID-19 pandemic. Industry segments relying on non-essential traveling, especially hotels and shopping malls, have been critically struck by the crisis. Still, as of May 1st, 2020, many real estate segments have not been affected directly. REITs on the other hand, have been strongly affected by the crisis, and are down more than the market portfolio across the publicly traded U.S. markets. Reasons for this, as well as the potential long-term effects on the market, will also be discussed in the thesis.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final ThesisMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2020
Number of pages104
SupervisorsJens Lunde