Using Capital Markets' Value Cycles in Allocating to Real Estate vs. Stocks or Bonds

Ronald Kaiser

Journal of Real Estate Portfolio Management, 1999, vol. 5, issue 1, 1-22

Abstract: Executive Summary. Traditionally, asset allocation involves efficient frontiers of forecasted returns and risks. The known limitations to this approach involve the nonnormality of real estate return distributions, the definition of volatility in appraisal-based returns and the sluggish liquidity in real estate. As a result, most institutional investors resort to “experience and intuition” in determining the proper asset mix. This article analyzes fundamental value measures since 1951: real estate cap rates, stock market earnings yields and ten-year bond yields. A simple model is constructed to allocate portfolios between stocks and real estate and between bonds and real estate, taking into account the inherent time delays and transaction costs. The conclusion is that fundamental value strategies can offer superior return/risk ratios to any of the single asset comparisons.

Date: 1999
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DOI: 10.1080/10835547.1999.12089563

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