ABSTRACT
This chapter considers the role of commercial property in multi-asset portfolios. Appraisal-based indices are usually used for commercial property, while transaction-based series are more common for residential property. The limitations of the data and the illiquidity of property can be taken into account in the Modern Portfolio Theory (MPT) analyses, so they should not lead to serious biases in the theoretical weights for property. Institutional investors must also consider their liabilities and must hold assets which are likely to allow them to meet such liabilities. Empirical evidence for Switzerland suggests that both direct property and shares of property companies should be included in multi-asset portfolios. Hoesli and Thion construct optimal portfolios for France for the period 1982-92. They find that the weight of property shares is in the 10-38 percentage range depending on the level of risk aversion. Mueller and Laposa show that the return and risk characteristics of REITs vary quite substantially depending on the property type.
