Asset allocation versus entrepreneurial decisions in real estate investment

Although the application of capital market theory is questionable in real estate investment, many institutional investors still perform asset allocation with historical real estate data. Entrepreneurial investment analysis relies on a different information setting. To date, it is unclear which approach, or which data set, offers the most efficient solutions for the use of capital. In order to evaluate policy recommendations for decision making in pension fund real estate investment, an empirical investigation of the investment environment in Germany is described here. The authors find that current market information restricts the application of capital market models. While the use of investment models and capital market models has been strictly separated, there is no theoretically justified reason for this. Investors should be aware that they can determine performance parameters for real estate only as approximations. Therefore, it may be fruitful to consider and compare alternative parameter estimates for determining optimal real estate allocations in pension fund investment.