Real Estate Asset Allocation and the Decisionmaking Framework Used by Pension Fund Managers

Abstract

Executive Summary. This study summarizes a survey that examined the decisionmaking process used by large defined benefit pension plans in their real-estate-only portfolios. Most researchers have concluded that a well-diversified portfolio should contain at least 10%-20% real estate. But it is well documented that pension plans typically hold less than 4%, on average, in equity real estate. The survey results provide some evidence to partially explain the divergence of theory from practice, as the decisionmaking process differs substantially from that recommended by theory. Furthermore, the decisionmaking process for equity real estate investment differs by size and type of fund, making generalizations across funds inappropriate. Furthermore, reported allocations may actually be incomparable across pension funds, since managers disagree about the classification of REIT shares (i.e., if they are real estate or common stock).