Volume 12 No. 1 (June 2018)

-By Mashitoh Halim, Noor Halil Ismail, Yusneta Idon and Raja Attirah Ahmad

Abstract

Although it is widely accepted that property is an important asset class in an investment portfolio, the role and significance of property are still debated. There is also a gap between empirical evidence and the practices of portfolio managers, with a few studies finding that the asset allocation for property in mixed-asset portfolios (comprising a few asset classes) are lower than optimal recommendations. Real estate is a unique asset, especially when compared to financial investment assets such as stocks or bonds. Hence, the inclusion of property in mixed-asset portfolios requires some alteration to the asset allocation framework. The objective of this paper is to further understand the role of property as an asset class in mixed asset portfolios. The first section discusses the strengths and weaknesses of the property as an asset class. The following section looks at the framework used to determine optimal property allocation in mixed asset portfolios, i.e. the constrained Markowitz efficient frontier. Finally, empirical evidence regarding the performance of the property and relevant asset classes in mixed-asset portfolios is summarized. This serves to provide a brief overview of the methodology used to investigate the performance of property in mixed-asset portfolios as well as general findings and implications. Despite its disadvantages, the property is still able to provide attractive returns and diversification benefits to a mixed-asset portfolio. Property investments are also found to be more return enhancing than risk-reducing as well as resilient in periods of financial crisis due to its lower correlation with other asset classes. 

Keywords: Mixed-Asset Portfolio, Optimal Asset Allocation, Property Investment, Efficient Frontier, Markowitz mean-variance

AN INTRODUCTION TO ASSET ALLOCATION OF PROPERTY IN A MIXED ASSET PORTFOLIO