Institutional perspective on real estate investing Comments to Dhar and Goetzmann’s. Jose G. Montalvo

Highlights The paper presents an analysis of the weight of real estate in the portfolio of institutional investors. Major findings: - classical motives for portfolio allocation -perceived risk: liquidity and lack of reliable data - uncertainty is critical in the decision Surveys? Only surveys? Internet survey? Traditional asset allocation Do not know= uncertainty?

Economics and surveys Pleople’s thinking versus people’s acting. I personally believe that looking at surveys on what people think is useful... but it cannot be the only source for a research. Case and Shiller (2004) on the housing bubble.

Internet surveys 1500 requests to get 173 completed questionnaires. Sample selection? Since the allocation of the portfolio in real estate is critical it would be interesting to get the population proportion right and see if the sample is somehow representantive Same for target allocation.

“Modern portfolio theory” “Perceive relative risk and return appear inconsistent with the reported low allocation to real estate.”...but answers are at odds with traditional measures of risk (IMF): only 11.6% say that real estate is riskier than equity.

“Modern portfolio theory” The reader would like to see the allocation derived from the simplest mean-variance model in order to interpret the results. There is also disagreement about the relative cost but, isn’t that something easy to know?

Uncertainty “Investor has uncertainty about the true return-generation process... Parameters may change over time... Potential failure of the market... Changing volatility...” Changing parameters model... Jumping processes... GARCH, EGARCH, IGARCH... “Uncertainty”: Bayesian mixture over different models

Uncertainty Do not know=uncertainty Could it be interpreted as “sometimes above but sometimes below”? This is not equal to “the same” answer but it is not uncertainty

Perception of risk Risk of real estate is perceived lower than other categories (except fixed income) by institutional investors Case and Shiller (2004) also found that there was little perceived risk associated with investing in housing. In addition they find no agreement among buyers about the causes of price movements and no cogent analysis of fundamentals.

Spanish housing bubble? Montalvo (2006): –94.5% of the individuals think that housing is overvalued. –42.5% think that the overvaluation is more than 50%... –but they expect and average growth rate of prices over the next ten years of %

Conclusion Substantial: Case and Shiller (1989) seems to apply also to institutional investors Methodological –Surveys? YES –Only surveys? NOT SO SURE