What is the optimal allocation towards real estate in the portfolio of the global pension fund global?
Abstract
In
this
master
thesis
we
evaluate
the
optimal
future
investment
allocation
towards
real
estate
for
the
Norwegian
Government
Pension
Fund
Global
(GPFG).
Based
on
an
assessment
of
the
relative
risk
and
return
attributes
of
equities,
bonds
and
real
estate
-‐
and
using
a
mean-‐variance
optimization
–
we
have
found
that
the
fund
should
allocate
a
full
11,2
%
of
its
capital
towards
real
estate
(59,4
%
to
equities
and
29,4
%
to
bonds).
This
is
twice
the
current
target
level,
and
would
represent
an
additional
235,6
BNOK
(42
BUSD)
of
GPFG
funds
being
allocated
to
investments
in
the
global
real
estate
markets.
In
performing
the
above
analysis
we
have
been
able
to
rely
on
a
fairly
well
documented
analysis
based
on
long
term
global
data
for
the
performance
and
volatility
of
bonds
and
equities.
Our
key
focus
has
been
to
assess
and
derive
the
appropriate
performance
characteristics
of
real
estate.
By
doing
looking
at
different
property
data,
we
have
been
able
to
develop
a
well-‐founded
view
of
the
historic
performance
of
real
estate
over
the
last
25
years.
In
addition
to
this
we
have
made
a
qualitative
assessment
of
the
asset
class
and
have
used
this
to
develop
what
we
feel
are
robust
and
reasonably
conservative
estimates
for
the
expected
future
performance
characteristics
of
a
global
property
portfolio.
Because
of
several
specific
characteristics
of
real
estate
it
has
been
argued
that
it
cannot
be
analyzed
in
a
simple
mean
variance
framework.
We
have
therefore
tested
the
robustness
of
our
findings
by
applying
additional
perspectives
and
approaches.
On
this
basis
we
remain
convinced
that
no
substantial
additional
adjustments
need
to
be
done
to
the
application
of
a
mean
variance
framework
to
account
for
real
estate
specific
risk
and
cost
aspects.
Based
on
our
analysis,
we
are
confident
that
the
GPFG
over
time
would
benefit
from
increasing
its
allocation
towards
real
estate
to
approximately
at
least
10
%.
This
could
contribute
to
improving
the
risk
return
relationship
of
the
portfolio,
as
measured
through
the
Sharpe
ratio.
We
have
quantified
the
likely
effect
from
an
improvement
in
the
risk
reward
ratio
to
250
million
NOK
(45
mill
USD)
in
additional
return
per
year,
with
the
current
market
capitalization
of
the
fund.