The allocation of real estate in an investment portfolio

Joubert, Hennie (2015-04)

Thesis (MBA)--Stellenbosch University, 2015.


ENGLISH ABSTRACT: In this study investors were informed of the benefits of diversification and the reduction of systematic risk when property is included in an asset allocation portfolio. It also provided investors with information that will assist them in deciding on asset class allocations, specifically including real estate within a mixed-asset portfolio for both the short and long term. The method applied to answer the research questions started with a detailed literature review in order to gain a thorough understanding of the topic. The second part involved a quantitative approach. The South African Property Index (SAPI), All Share Index (ALSI) and All Bond Index (ALBI) total returns were analysed using descriptive statistics in order to gain knowledge about the return (mean) and risk (standard deviation) performances of the three asset data series. The final part analysed the allocation weights of assets in a mixed portfolio to determine the optimal portfolio weights to either reduce risk or enhance returns. It was found for the period under review that property quarterly returns outperformed equity and bonds. The compound annual growth rate for the period was calculated and it was found that property had a growth rate of 26.1 per cent, equity a growth rate of 17.9 per cent and bonds a growth rate of 10.9 per cent. The risk rate for property was also determined and it was higher than for equity and bonds. The study also found a correlation between bonds and properties, meaning that adding bonds to a real estate portfolio would not give much diversification benefit. Equity to bonds had a negative correlation, showing diversification benefits of adding bonds to an equity portfolio. However, equity to property had a low correlation, meaning that adding property to an equity portfolio would reduce portfolio risk and increase returns. Should an investor not want to be exposed to more risk than simply holding one asset, namely bonds, a portfolio gives substantially higher returns without increasing the risk The study also observed the changes in the asset class returns during certain economic activities. Bonds were found to be the most resistant of the three asset classes and equity the most affected.

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