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In this article the author examines the constant and variable liquidity direct real estate price indexes developed by Fisher, Gatzlaff, Geltner, and Haurin and uses them in asset allocation exercises. Review of these indexes suggests they provide improved measures of direct real estate performance that do much to remedy problems resulting from the appraisal-induced smoothing of the NCREIF property index. Optimization results based on the period from 1987 to 2001 indicate that significant overweighting of both direct and securitized real estate was appropriate and that direct and securitized real estate were complementary investments. These results and related considerations suggest that real estate should receive at least a neutral weighting in contemporary institutional portfolios.
Barry Feldman (Fri,) studied this question.