Spanning Tests on Public and Private Real Estate

Abstract

Executive Summary. This study uses mean-variance spanning tests to examine the roles of public and private real estate in mixed-asset portfolios. The results suggest that the usefulness of including equity real estate investment trusts (REITs) in improving investment opportunity sets is sensitive to the specification of benchmark assets. In contrast, private real estate yields diversification benefits in various specifications of benchmark assets. The results imply that, when private real estate is already in a mixed-asset portfolio, there is limited room for equity REITs. Equity REITs are substitutes for private real estate in a mixed-asset portfolio when direct investing in private real estate is not feasible because of liquidity, transaction costs, and economies of scale. This result explains why large fund sponsors tend to allocate more to private real estate than to public real estate.

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