Journal of Finance and Investment Analysis

Real Estate Investment Trusts versus Direct Real Estate Investments: A Portfolio Optimization Approach

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  • Abstract

    We analyze the risk adjusted performance of Real Estate Investment Trusts (REITs) and Direct Real Estate Investments using US data between 1980 and 2014. As opposed to previous studies where emphasis was placed on Economies of Scale this study employs a multi-constraint portfolio optimization approach based on Mean Variance Optimization and Mean Gini Coefficient Approach. We find that Direct Real Estate Investments outperform REITs without the minimum return constraint. When we incorporate the minimum return constraint REITs out-perform Direct Real Estate Investments both for annual and monthly returns. These results can be attributed to the high risk-return characteristic of REITs.