Institutional perspective on real estate investing

1
Institutional perspective on real estate investing

• Comments to Dhar and Goetzmanns.
• Jose G. Montalvo

2
Highlights

• The paper presents an analysis of the weight of
  real estate in the portfolio of institutional
  investors.
• Major findings
• - classical motives for portfolio allocation
• perceived risk liquidity and lack of reliable
  data
• uncertainty is critical in the decision

• Surveys?
• Only surveys?
• Internet survey?
• Traditional asset allocation
• Do not know uncertainty?

3
Economics and surveys

• Pleoples thinking versus peoples acting.
• I personally believe that looking at surveys on
  what people think is useful...
• but it cannot be the only source for a research.
• Case and Shiller (2004) on the housing bubble.

4
Internet surveys

• 1500 requests to get 173 completed
  questionnaires.
• Sample selection?
• Since the allocation of the portfolio in real
  estate is critical it would be interesting to get
  the population proportion right and see if the
  sample is somehow representantive
• Same for target allocation.

5
Modern portfolio theory

• Perceive relative risk and return appear
  inconsistent with the reported low allocation to
  real estate.
• ...but answers are at odds with traditional
  measures of risk (IMF) only 11.6 say that real
  estate is riskier than equity.

6
Modern portfolio theory

• The reader would like to see the allocation
  derived from the simplest mean-variance model in
  order to interpret the results.
• There is also disagreement about the relative
  cost but, isnt that something easy to know?

7
Uncertainty

• Investor has uncertainty about the true
  return-generation process... Parameters may
  change over time... Potential failure of the
  market... Changing volatility...
• Changing parameters model... Jumping
  processes... GARCH, EGARCH,
  IGARCH...
• Uncertainty Bayesian mixture over different
  models

8
Uncertainty

• Do not knowuncertainty
• Could it be interpreted as sometimes above but
  sometimes below? This is not equal to the same
  answer but it is not uncertainty

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Perception of risk

• Risk of real estate is perceived lower than other
  categories (except fixed income) by institutional
  investors
• Case and Shiller (2004) also found that there was
  little perceived risk associated with investing
  in housing.
• In addition they find no agreement among buyers
  about the causes of price movements and no cogent
  analysis of fundamentals.

10
Spanish housing bubble?

• Montalvo (2006)
• 94.5 of the individuals think that housing is
  overvalued.
• 42.5 think that the overvaluation is more than
  50...
• but they expect and average growth rate of prices
  over the next ten years of... 23.4

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Conclusion

• Substantial Case and Shiller (1989) seems to
  apply also to institutional investors
• Methodological
• Surveys? YES
• Only surveys? NOT SO SURE