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Real Estate in Liability-Driven Investment: The Case of U.S. Pension Funds

Author

Listed:
  • Louis Johner

    (University of Geneva - Geneva School of Economics and Management)

  • Martin Hoesli

    (University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School)

Abstract

This paper examines the role of real estate in U.S. pension portfolios, considering various funding ratios and liability durations. It also investigates the composition of the real estate allocation across sectors and market types. We develop a non-parametric block bootstrap surplus optimization that incorporates modelled liabilities that account for changes in pension beneficiaries' wages, changes in the discount rate curve, and mortality. When considering the liabilities of a pension fund, the optimal real estate allocation is found to be substantially lower than in the asset-only case. Plans that are relatively close to a zero surplus exhibit the highest allocations. When low-risk portfolios are considered, plans that have a longer duration have a higher allocation to real estate than plans with a shorter duration. For a high-risk strategy, the highest real estate allocations are for plans that have moderate liability durations. Overall, our results support the institutional investor preferences for gateway markets. Concerning sectoral allocations, industrial properties dominate the real estate allocation.

Suggested Citation

  • Louis Johner & Martin Hoesli, 2024. "Real Estate in Liability-Driven Investment: The Case of U.S. Pension Funds," Swiss Finance Institute Research Paper Series 24-62, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2462
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    More about this item

    Keywords

    Commercial Real Estate; Mixed-Asset Portfolio; Pension Fund; Gateway Markets; Surplus Optimization; Resampled Efficient Frontier;
    All these keywords.

    JEL classification:

    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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