THE BENEFITS OF REAL ESTATE
In recent years, real estate investment has been at the forefront of investors’ investment opportunity set. However, the recent sub-prime crisis and the resulting impact on real estate valuation have often been viewed as the lynchpin of the current economic crisis. In this annual update, the return and risk characteristics of various domestic and international real estate investment indices are reviewed. Results show that traditional market factors, especially equity market returns, often are highly correlated with various forms of real estate investment trusts, making these forms of real estate investment more of a return enhancer than a risk diversifier to portfolios comprised principally of traditional stock and bond investments. In contrast, other forms of real estate investment, including commercial investments, seem to offer investments with both return enhancement and risk diversification benefits. Results also show that while accounting-based (internal rate of return) and market-based returns often reflect similar return processes, differences do exist and investors should be aware of potential issues in the use of various accounting-based real estate benchmarks.