THE ROLES OF REITS AND DIRECT REAL ESTATE IN AN INSTITUTIONAL MIXED-ASSET PORTFOLIO

Abstract

With the introduction of Real Estate Investment Trust (REITs) in Singapore, there is the presence of yet another real estate investment alternative. Direct real estate investment, which refers to traditional ownership of real estate to achieve rental income, is increasingly being purchased by institutional investors for securitization purposes. This study aims to find out the roles of REITs and direct real estate investment in an institutional mixed asset portfolio which generally consists of other major asset classes like stocks and bonds. In the process, this paper will also seek to investigate if direct real estate still has a role to play in institutional investments. The study subjected REITs and direct real estate to be allocated into various mix-asset portfolios. The optimal allocation of each asset is then observed to see their respective portfolio weight under different risk-returns possibilities. Efficient frontiers are also constructed to see the opportunity sets that can be achieved with the inclusion of each real estate asset class into various portfolios. The results are then analyzed using principles from Modern Portfolio Theory and other finance theories. REITs are found to have achieved higher target rates of returns for institutional portfolios whereas direct real estate acts as a diversifier of risk because of its negative correlation with stocks which was tested using a correlation matrix. This study proves that both REITs and direct real estate have different roles to play in an institutional mixed-asset portfolio.