Global commercial real estate - A strategic asset allocation study

This article explores the role of global commercial real estate in a strategic asset allocation. Global REIT and listed real estate stock indices are used to proxy the broader direct and indirect equity global commercial real estate asset classes. In a historical analysis, using traditional mean-variance optimization the author finds that adding North American real estate dramatically improves the risk and return characteristics of the resulting asset allocations, while the addition of Asian and European real estate offers little improvement. In a set of forward-looking optimization using robust asset allocation tools such as reverse optimization, the Black-Litterman model, and resampled mean-variance optimization, it is observed that global commercial real estate should play a relatively large role in strategic asset allocation moving forward. Other contributions include the development of a working version of the market portfolio that includes global commercial real estate, an analysis of the overlap between popular equity asset class proxies and indirect real estate proxies, and recognition that the popularity of indirect real estate has confused asset allocators.