Ibbotson explored optimal global real estate allocations by creating and comparing the performance of optimal portfolios based on two different methodologies: one that constructed portfolio performance using historical investment returns for various asset classes, and another that projected future portfolio performance using forward-looking, expected investment returns.

Ibbotson's historical analysis of data for the period 1990-2005 showed the addition of global real estate allocations improved returns of global portfolios, with nearly all of that increase coming from U.S. real estate investment, according to Thomas Idzorek, Ibbotson Associates' Vice President of Research and Product Development, and co-author of the study.

"The forward-looking analysis indicated that North American real estate should continue to be approximately half of the total real estate allocation in an optimized global portfolio and serve as a core component of the global market portfolio," Idzorek said. "As compared with the optimized portfolio based on historical data, future allocations to European and Asian real estate should increase. The forward-looking optimizations include significant allocations to Asian and European real estate. As always, the key is diversification."

Real Estate Boosts Historical Portfolio Returns
Ibbotson created its historical models by charting risks and returns for various asset classes for the 1990-2005 period and constructing optimized portfolios of moderate risk (defined by a volatility level of 10 percent) with and without global listed real estate. The real estate asset class was represented by the FTSE EPRA/NAREIT Global Real Estate Index, with its North American, European and Asian sub indices.

The researchers found that the optimized real estate allocations by region placed the bulk of investment in North America, because of its superior returns and lower volatility, with little allocation to Europe and none to Asia.

Modeling the Future
The future performance of global real estate, however, is unlikely to be the same as that of the past. Consequently, Ibbotson constructed estimates of future investment returns for each asset class by blending historical returns with expected future returns. Importantly, the future return calculations took into consideration the historical levels of risk (volatility) and correlation for each asset class and geographic region, based on the assumption that, over time, higher levels of risk will be commensurate with higher returns.

In Ibbotson's unconstrained, forward-looking optimizations, allocations to global real estate range from 15 to 24 percent at the moderate-risk level (10 percent volatility). The allocations, however, were diversified among the world's real estate markets.

"Approximately half of the real estate allocation - 12.1 percent of the total portfolio - still went to North America," said NAREIT Executive Vice President of Research and Investor Outreach Michael Grupe. "However, one-third of the forward-looking real estate allocation - 7.8 percent of the total portfolio - went to Europe, and 3.4 percent of the total portfolio went to Asian real estate."
Additionally, Ibbotson's forward-looking expected returns are more conservative when compared with historical investment performance. Including global real estate, Ibbotson projected a 9.60 percent average total return for the optimal forward-looking portfolio, down from the 10.98 percent average annual return of the optimal historical portfolio.

"Ibbotson's forward-looking results point to the growing importance of the European and Asian real estate markets for global investors - but also to the continuing importance of the North American market and the overall importance of real estate investment in a globally allocated long-term portfolio," Grupe said. "However, they also may indicate that, going forward, investors may be required to assume more risk to achieve returns comparable to historical ones."

The National Association of Real Estate Investment Trusts„_ƒn(NAREIT) is the representative voice for U.S. REITs and publicly traded real estate companies worldwide. Members are real estate investment trusts (REITs) and other businesses that own, operate and finance income-producing real estate, as well as those firms and individuals who advise, study and service those businesses. Visit our Web sites at www.nareit.com and www.investinreits.com.

NAREIT does not intend this press release to be a solicitation related to any particular company, nor does it intend to provide investment, legal or tax advice. Investors should consult with their own investment, legal or tax advisers regarding the appropriateness of investing in any of the securities or investment strategies discussed in this publication. Nothing herein should be construed to be an endorsement by NAREIT of any specific company or products or as an offer to sell or a solicitation to buy any security or other financial instrument or to participate in any trading strategy. NAREIT expressly disclaims any liability for the accuracy, timeliness or completeness of data in this publication. Unless otherwise indicated, all data are derived from, and apply only to, publicly traded securities. Any investment returns or performance data (past, hypothetical, or otherwise) are not necessarily indicative of future returns or performance.

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Ron Kuykendall
NAREIT
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Alexa Auerbach
Morningstar
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