The diversification potential of securitized real estate for mixed portfolios in South Africa

Abstract

Research indicates that investment in un-securitised private real estate in both developed and emerging economies exhibits inflation hedging potential and provides diversification benefits for mixed-asset portfolios, reducing the risk of portfolios that contain mostly common stocks and bonds. This paper examines the risk diversification potential of securitised property funds for investment portfolios comprising traditional asset classes such as common stocks, bonds and cash instruments in the South African context – to establish if they exhibit the same characteristics as un-securitised private real estate. The results indicate that including securitised property funds in a portfolio comprised of traditional assets reduces unsystematic risk in a portfolio by a significant amount. We also assess the affecters of variability in returns of PUT and PLS funds. The results suggest that the variability in PUT and PLS returns can be explained by both the variability in the equity and debt markets (measured by the ALSI and ALBI), and the variability in direct property returns. Importantly, we find that PUT and PLS market pricing is representative of the underlying asset class pricing (direct real estate prices).