Public and Private Real Estate in a Portfolio in Crisis and Non-Crisis Periods

Although public and private real estate have common economic drivers, the response of their returns to crises often differs in time and in magnitude. Whereas the listed real estate market tends to react quickly and sharply to a shock, the impacts are usually more muted and are lagged for the direct market. Against this background, limited research has investigated whether it is beneficial to combine listed real estate and direct investments in a mixed-asset portfolio and what the optimal allocation to real estate should be during crisis and non-crisis periods. Using U.K. and U.S. monthly data from 2006 to 2023, this research seeks to dig deeper into the benefits of combining public and private real estate in a mixed-asset portfolio in periods of market turmoil and in periods of stability. For each country, we also aim to explore the composition of the real estate bucket by considering the main property sectors. In this context, the paper should inform U.K. and U.S. investors about the breakdown between public and private real estate and about how the allocations vary across sectors. Specifically, we aim to answer the following research questions. Can the combination of public and private real estate generate superior risk-adjusted performance in a mixed-asset portfolio and do the benefits change with market conditions? How does the allocation to public and private real estate in a mixed-asset portfolio change in crisis versus non-crisis periods? What is the composition of the real estate bucket across sectors in crisis versus non-crisis periods? Are there differences in portfolio compositions for U.K. versus U.S. investors and how can these be explained? The period under investigation is of interest as it includes three significant crises: the global financial crisis and its aftermath leading to the European sovereign debt crisis, the COVID-19 pandemic, and the Ukraine conflict and subsequent periods of rising interest rates.