Alternative Investing

Demystifying Illiquid Assets: Expected Returns for Private Real Estate

Topics - Alternative Investing Asset Allocation

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Demystifying Illiquid Assets: Expected Returns for Private Real Estate

The growing interest in illiquid assets including real estate means that allocators must carefully consider their risk and return. The
challenge is that modeling private real estate is not straightforward due to a lack of good quality data and artificially smooth returns.
We try to demystify the subject considering theoretical arguments, historical average returns, and forward-looking yield-based analysis. In the process, we explain why naïve comparisons to public counterparts can be misleading. For institutional investors trying to calibrate their asset allocation decisions for private real estate, we lay out a framework for expected returns, albeit a noisy one, that is based on a discounted cashflow framework similar to what we use for public stocks and bonds.

 

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

 

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