A Liquid Benchmark for Private Real Estate

Abstract

Commercial real estate represents an important element of the asset allocation process, but is difficult to access directly. There are high barriers to entry and exit. In times of financial stress, it can be very difficult to liquidate holdings. Listed (or publicly held) real estate is far more liquid, but also comes with its own set of problems. These securities are much more volatile, especially over shorter time frames, and incorporate an additional layer of corporate leverage. Indexes tracking direct and listed real estate differ significantly in their calculation methodologies, making direct comparisons difficult.

We have attempted to capture the best of the two worlds: an investable index with a risk and return profile of direct (private) real estate, providing a more accurate measure of the asset class’s performance and the liquidity of listed (public) real estate, providing timelier valuations, greater transparency, and greater investability. We achieved this construction by lowering the volatility and deleveraging a listed real estate index.

This approach may appeal to both smaller asset owners who are not large enough to build a diversified direct real estate portfolio and to larger investors as a liquid way to quickly build or reduce exposure to this asset class.