Dutch Direct Real Estate Investments in Private Portfolios

Direct real estate plays an important role in our daily lives. The place of direct real estate in the portfolio of a private investor is often limited however. The paper attempts to answer the question of how large the allocation to direct real estate should be to attain an optimal risk/return portfolio. Data used for direct real estate are data of the Dutch real estate market as measured by the ROZ/IPD. Markowitz' portfolio optimization technique is used to calculate the optimal portfolios. Geltner's unsmoothing technique is applied to counter possible smoothing of direct real estate data. Historical and expected returns were used to calculate efficient frontiers and direct real estate allocations. Results of the study show that, even when unsmoothing is taken into account, the allocation to direct real estate under scenarios based on historical and expected real return is substantial for most risk/return profiles. Contrary to most private portfolio allocations to real estate, the allocation to real estate is largest in above average risk/return profiles.