Real Estate Asset Management of German institutional investors - Theory and Reality

The integration of the asset class Real Estate into the context of the asset allocation decision-making process is of growing concern to institutional investors in Germany. Especially those investors holding mixed-asset portfolios are considering new approaches to determine what share of their assets should be allocated to real estate, and how their real estate portfolios should be structured. The first part of this paper presents a theoretical model of real estate asset management illustrating the ideal decision-making process. The model takes into account the findings of Modern Portfolio Theory and the empirical evidence of previous studies on the diversification benefits of real estate. Using a Markowitz optimisation model it can be shown that the integration of directly-held German real estate investment, as well as German real estate shares, in mixed-asset portfolios achieves positive diversification effects. The second part of this paper investigates the actual real estate decision-making process based on the results of a survey conducted among German life insurance companies and pension funds. The survey shows a significant gap between the theory and reality of real estate asset management of German institutional investors.