Analyzing Real Estate Portfolio Returns

Abstract

Private real estate returns cannot be explained adequately by alpha and beta alone. The fact that so many real estate managers claim positive and persistent alpha performance versus the NCREIF benchmark seems simply unbelievable to public securities investors, who know that alpha is a zero-sum game. Perhaps this outperformance is simply the result of value creation strategies such as new development or redevelopment, something that can occur only in private market investing strategies that allow the investor to take control of the asset. This third component of return—value creation—is here called gamma, making the real estate portfolio return equation equal beta + alpha + gamma. An analytic approach to such three-way performance attribution indicates that gamma is likely a much more powerful explanation of private equity portfolio outperformance than alpha could ever be.

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