How do Non-Core Allocations Affect the Risk and Returns of Private Real Estate Funds?

Spencer J. Couts ()
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Spencer J. Couts: University of Southern California

The Journal of Real Estate Finance and Economics, 2024, vol. 68, issue 4, No 7, 715-748

Abstract: Abstract This paper documents that funds with greater non-core allocations have higher market risk exposure, β, but lower returns. Additionally, it documents that one reason their returns are lower is because they poorly time their investment into these properties. Open-end private real estate funds have higher non-core allocations at the top of the market and lower allocations at the bottom. As such, these funds are disproportionately exposed to the downside of the market. Lastly, I find that reaching for yield and fund flow pressure are important determinants of this phenomenon. Funds buy relatively more non-core properties when either the market return expectations or their net queues are smaller. Buying more core properties when queues are larger enables managers to place capital quicker, but it also hurts existing investors by decreasing their market risk exposure at the time when it is the most desirable and beneficial.

Keywords: Asset pricing; Risk factors; Factor loadings; Commercial real estate (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 G14 G23 R33 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11146-022-09886-0

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