CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

CHAPTER 15

Real Estate as an Investment

Real estate has been a very large and important portion of wealth for thousands of years. Even as recently as a century ago, real estate dominated institutional portfolios and was referred to as property. During recent decades, the preeminence of real estate has yielded to the growing importance of intangible assets. Yet real estate remains a valuable part of any well-diversified portfolio.

The transition of real estate from dominating traditional institutional-quality investments to being an alternative investment raises important issues as to how to evaluate real estate on a forward-looking basis. This chapter provides an overview of the attributes, asset allocation, categories, and return drivers of real estate.

15.1 ATTRIBUTES OF REAL ESTATE

Real estate, and any other asset for that matter, should be included in a portfolio until the marginal benefits of additional investment equal the marginal costs of additional investment. An optimized portfolio is achieved when additional investments in each asset and asset class are equally attractive. In other words, exposure to each type of real estate investment, and to real estate overall, should be added until the net benefits have diminished to the point that allocations to other investments are equally attractive.

15.1.1 Five Potential Advantages of Real Estate

What are the aspects of real estate that make it attractive or unattractive relative to other asset classes? There are five common ...