Allocating as little as 10 percent of a defined contribution plan portfolio to a mix of listed and unlisted real estate can improve the probability of successful retirement outcomes.
Probably not surprisingly, that’s according to a new study released by the Defined Contribution Real Estate Council. The study, “A Path to Better Retirement Outcomes: Allocating Real Estate Assets to Retirement Portfolios,” asserted that a portfolio that includes real estate -- an asset that typically takes longer to sell -- could help participants avoid “adverse” responses to market drops, such as selling off risky assets and exiting the market altogether after a significant downturn.
The “gradual” transition approach makes it more likely that participants will stay on course toward their goals.
The study, which examined the period between January 1976 to January 2014, looked at historical DC-style asset allocations, including target date and target risk funds. It also added a 10 percent allocation to real estate for research purposes.
The range of investments in the simulated portfolios ran the gamut from 100 percent stocks to a 60/40 stock/bond blend, and used well-known established target-date and target-risk glide-paths. The real estate allocation consisted of a 50/50 blend of listed and unlisted real estate. The portfolio simulations that included an allocation to real estate carved out that allocation equally from the portfolio’s allocations to stocks and bonds.
The study’s authors determined that results for portfolios with real estate allocations achieved similar results, and in some cases better results, to those without a real estate component. They also said there were better tail risk characteristics and a “smoother path to the end goal” in the portfolios with real estate allocations.
The study also found that, while plan sponsors have accepted REITs because they’re more easily incorporated into a portfolio, they’re reluctant to venture into unlisted real estate allocations.
However, the authors said that “unlisted core real estate has a number of characteristics that should make it attractive to plan sponsors as well, including returns closer to that of bonds but with significantly lower (reported) risk than stocks, regular income (making it a reasonable bond substitute), low (reported) volatility and low correlation to listed markets.”
“In addition,” they wrote, “some types of unlisted real estate have demonstrated inflation hedging characteristics, potentially making the asset class a reasonable defensive asset from the perspective of a liability-driven investor.”
The DCREC was formed in 2012 to promote the inclusion of investments in direct commercial real estate and real estate securities in DC plans.