| The importance of real estate as an asset class is evident from its representation of nearly one-half of world financial wealth and its ability to provide diversification gains, when included in a traditional portfolio of corporate stocks and bonds. With this information available, however, institutional investors commit less than the optimal amount of funds to real property. This study considers the market characteristics of commercial real estate to analyze the disparity of optimum and actual allocation to real property. Consideration of incomplete markets/illiquidity, non-homogeneity, multi-period contracting, and market power provides information about the behavior of commercial real property relative to stocks and bonds. Since investors have a choice of including securitized, as well as unsecuritized real property in their portfolios, an analysis of asset lumpiness provides insight into the behavioral differences existing between the two property investment forms.; A trade-off between liquidity and control results from the decision to invest in securitized or unsecuritized real estate. In addition, institutional investors have a fiduciary duty to behave prudently when deciding which type of real property to hold. In order to provide information concerning the long-run and short-run relationships existing between securitized and unsecuritized real estate, cointegration and Granger causality tests are run. The results indicate the two time series have no long- or short-run equilibrium relationships. These findings suggest the two real estate markets are not inefficient in the weak form.; The study also proposes a model for estimating returns in the market for lumpy, unsecuritized real estate. Tests for a long-run relationship existing between the implied series resulting from the model and the observed series is run for evidence of the model's prediction ability. The implied and observed time series display a long-run equilibrium link, implying the model generates returns that are similar to those existing in the market.; The study concludes that the two investment choices, securitized and unsecuritized real estate, do not behave similarly in the long-run and no Granger causality exists in the short-run. These results indicate, therefore, that the two real estate markets are not inefficient in the weak form. |
