Institutional perspective on real estate investing
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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 l.jpg

Institutional perspective on real estate investing

Commentsto Dhar and Goetzmann’s.

Jose G. Montalvo

Highlights l.jpg

  • 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 l.jpg
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 l.jpg
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.

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“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.

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“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?

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  • “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

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  • 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

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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.

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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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  • Substantial: Case and Shiller (1989) seems to apply also to institutional investors

  • Methodological

    • Surveys? YES

    • Only surveys? NOT SO SURE