Private real estate investing : expectations vs. reality : an empirical analysis on the characteristics of private real estate in oslo between 2005-2018

Abstract

In this thesis, we analyze the characteristics of private real estate (PRE) as an asset. The analysis is done in several increments, starting from the one-year holding period index risk and return of PRE. Each subsequent model adjusts the risk and return measure of PRE to either account for a market imperfection, or for a retail investor perspective. After all adjustments are implemented, we are left with a final model adjusted for individual house risk and liquidity risk, imputed rent, leverage, owner costs, taxation and a five-year holding period. We find that the imputed rent, leverage and holding period have the largest impact on the return, while the individual house risk, leverage and holding period substantially affect the risk. Furthermore, we find that these adjustments increase the annual Sharpe-ratio of PRE from 0.71 in our initial model, to 1.82 in our final model. For each increment we also analyze the Sharpe ratio of the tangent mixed-asset portfolio consisting of the PRE asset, a broad stock fund and broad a bond fund. As a result of the increase in the PRE asset Sharpe ratio, the allocation to this asset in the tangent mixed-asset portfolio increases from 32.05% to 50.82% in the final model. The Sharpe ratio of the tangent portfolio therefore increases from 0.86 to 1.85, and unlike in the initial model, including PRE in the mixed-asset portfolio significantly improves portfolio efficiency in the final model. By comparing the efficient frontiers with and without PRE, we find that while the dominating characteristic of PRE in initial mixed-asset portfolio is to be risk reducing, the dominating characteristic in the final model is to be return enhancing. The PRE asset in all models exhibits both characteristics to some extent, and the size of the effects is the largest in the final model.