Public versus Private Real Estate: Portfolio Construction Considerations

Abstract

We examine the relationship between the returns of different types of public and private real estate investments and the extent to which they should be considered substitutes in a multi-asset portfolio context. We use principal component analyses to gain insights on the distinct drivers of return across private real estate, listed real estate, and equities. We examine the commonality of return drivers over the longer-term, but also at points of market stress and demonstrate that the investment returns of public and private real estate exhibit material deviations over shorter time periods. We conclude that, instead of thinking of public and private real estate as substitutes, asset allocators need to consider broader portfolio considerations, including the size of the allocation, the objective of the investment and potential liquidity needs.