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Institutional perspective on real estate investing

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

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  1. Institutional perspective on real estate investing Commentsto Dhar and Goetzmann’s. Jose G. Montalvo

  2. 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?

  3. 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.

  4. 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.

  5. “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.

  6. “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?

  7. 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

  8. 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

  9. 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.

  10. 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%

  11. Conclusion • Substantial: Case and Shiller (1989) seems to apply also to institutional investors • Methodological • Surveys? YES • Only surveys? NOT SO SURE

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