Abstracts for Vol. 3, No. 1 of the Journal of Real Estate Portfolio Management

The Coming Downsizing of Real Estate: Implications of Technology

John S. Baen and Randall S. Guttery

Currently there is explosive growth in the availability of databases that may be merged to create "user friendly" real estate-related market information and services. A reduction in traditional personal customer services required (e.g. Competitive Market Analysis), and the case of collection, assimilation, and processing of information, will have major implications for the real estate industry and future employment prospects. This study collects employment trends by SIC codes and other sources, and analyzes the rapid changes occurring in the areas of real estate brokerage, finance, appraisal, leasing and title insurance, due to technology. The findings suggest that the number of real estate participants currently employed should decline signinificantly because of increased efficiencies. Property buyers and sellers may eventually receive an income transfer from licensed agents, lenders, appraisers, attorneys, and loan servicers.

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Agency Costs and Inefficiency in Commercial Real Estate

Richard A. Graff and James R. Webb

Persistence in partially disaggregated NCREIF returns suggests that the institutional real estate market is inefficient and that the most significant source of market inefficiency is agency cost. A major structural distinction between the stock and real estate markets is the imposititon of an agency cost control mechanism on stock portfolio managers by the existence of continuous price discovery in the stock market. Persistence in extreme return behavior distinguishes the effect of multiyear agency cost amortization on real estate returns from the effect of market dynamics subsequent to asset acquisition. The application of persistence tests to real estate return series can form the basis for substitute portfolio controls to compensate partially for the absence of continuous price discovery from the real estate market.

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Real Estate Portfolio Analysis under Conditions of Non-Normality: The Case of NCREIF

Peter Byrne and Stephen Lee

Modern portfolio theory (MPT) has increasingly been applied in the area of real estate analysis in order to examine and justify the place of real estate in the mixed-asset portfolio. However the application of MPT presents a number of theoretical problems when the data exhibits non-normality.

This study outlines these difficulties, and presents a portfolio selection model based on the Mean Absolute Deviation (MAD). This method can address the problems and produces results that are essentially identical to those produces by MPT. This study demonstrates the MAD method, and applies it to the NCREIF regional data over the period from IQ 1983 to 4Q1994.

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Real Estate Asset Allocation and the Decisionmaking Framework Used by Pension Fund Managers

Elaine M. Worzala and Vickie L. Bajtelsmit

This study summarizes a survey that examined the decisionmaking process used by large defined benefit pension plans in their real-estate-only portfolios. Most researchers have concluded that a well-diversified should contain at least 10% - 20% real estate.But it is well documented that pension plans typically hold less than 4%, on average, in equity real estate. The survey results provide some evidence to partially explain the divergence of theory from practice, as the decisionmaking process differs substantially from that recommended by theory. Furthermore, the decisionmaking process for equity real estate investment differs by size and type of fund, making generalizations across funds inappropriate. Furthermore, reported allocations may actually be incomparable across pension funds, since managers disagree about the classification of REIT shares (i.e. if they are real estate or common stock).

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Long Term Portfolio Returns from Timber and Financial Assets

Thomas A. Thomson

This study estimates inflation adjusted multiperiod portfolio returns from direct real estate investments in Douglas fir and Southern pine timber stands combined with common stocks, corporate bonds, U.S. Government bonds, and U.S. Government treasury bills over the fifty-eight-year period 1937 - 1994. A theoretical timber returns benchmark is created that is highly correlated to historical timber prices. The wealth accumulation one may have realized during the 1937 - 1994 period from investments in Douglas fir, Southern pine and common stocks is presented. The wealth accumulation is substantial for each of these assets, but the timber assets display both a higher return and higher variability. An empirical risk-return relationship for the financial market investments is developed using a multiperiod portfolio optimization technique. Timber asset returns are then included with security returns as input for the portfolio optimization routine. When the optimization model allowed unrestricted choice among assets, it was common to include timber assets in the portfolio. Timber assets were in some cases the only components of the portfolio. The long-run-risk-return results, however, were unfavorable. Employing a strategy of holding a fixed portfolio allocation (%) of timber assets while rebalancing one's holding of financial assets, however, appears favorable. Holding a fixed 10% of a portfolio in timber showed about a 1% higher rate-of-return across portfolios with no increase in risk. Higher timber proportions indicated higher returns, but with higher risk.

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