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Institutional perspective on real estate investing. Comment s to Dhar and Goetzmann’s . Jose G. Montalvo. 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

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institutional perspective on real estate investing

Institutional perspective on real estate investing

Commentsto Dhar and Goetzmann’s.

Jose G. Montalvo

highlights
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?
economics and surveys
Economics and surveys
  • Pleople’s thinking versus people’s 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.
internet surveys
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.
modern portfolio theory
“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.
modern portfolio theory6
“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, isn’t that something easy to know?
uncertainty
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
uncertainty8
Uncertainty
  • Do not know=uncertainty
  • Could it be interpreted as “sometimes above but sometimes below”? This is not equal to “the same” answer but it is not uncertainty
perception of risk
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.
spanish housing bubble
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%
conclusion
Conclusion
  • Substantial: Case and Shiller (1989) seems to apply also to institutional investors
  • Methodological
    • Surveys? YES
    • Only surveys? NOT SO SURE