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An analysis of the impact of timberland, farmland and commercial real estate in the asset allocation decisions of institutional investors
Author(s) -
Waggle Doug,
Johnson Don T.
Publication year - 2009
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2008.03.003
Subject(s) - real estate , portfolio , asset allocation , capitalization rate , institutional investor , economics , real estate investment trust , estate , business , project portfolio management , asset (computer security) , actuarial science , finance , financial economics , computer science , corporate governance , computer security , management , project management
We examine the effects of including timberland, farmland and commercial real estate in a mixed asset portfolio with stocks, government bonds and T‐Bills. Using both smoothed and unsmoothed returns (as per Geltner [Geltner, D. (1993). Estimating market values from appraised values without assuming an efficient market. Journal of Real Estate Research , 8, 25–345.]) and both constrained and unconstrained allocation assumptions (as per Eichhorn, Gupta and Stubbs [Eichhorn, D., Gupta, F., & Stubbs, E. (1998). Using constraints to improve the robustness of asset allocation. Journal of Portfolio Management, Spring , 41–48.]), we employ Markowitz portfolio optimization and find widely varying allocation outcomes. However, timberland entered nearly all portfolios, accounting for large percentages in several scenarios, while farmland entered only low‐risk portfolios. At lower risk levels, commercial real estate dominates the real estate allocation but as acceptable risk levels rise, timberland supplants commercial real estate as the primary component of the portfolio's real estate allocation.