Compiled by Brad Case

Researchers from Morningstar and Ibbotson Associates studied the role of real estate in optimal global investment portfolios using forward-looking capital market assumptions. Thomas M. Idzorek of Ibbotson Associates along with Michael Barad and Stephen L. Meier of Morningstar concluded, in an independent article based on research sponsored by NAREIT, that most investors should allocate between 12 percent and 35 percent of their holdings to global real estate, with close to half of those holdings in the United States.

"The increased scrutiny on publicly traded real estate companies in North America because of the increased securitization of direct real estate investments has led to gradual efficiency gains that contributed to the out-performance of historical real estate returns.

The optimal conservative asset allocation is approximately 71 percent fixed-income, 17 percent equities and 12 percent commercial real estate equities. The moderate asset allocation is approximately 40 percent fixed-income, 37 percent equities and 23 percent commercial real estate equities. The aggressive asset allocation is approximately 7 percent fixed-income, 58 percent equities and 35 percent commercial real estate equities.

We believe almost all investors should own REITs and listed real estate stocks. For investors without appropriate direct real estate asset allocations, a separate asset allocation to commercial real estate implemented with exposure to REITs and listed real estate stocks worldwide seems to be the best alternative.

While REITs today represent a modest percentage of total commercial real estate investment, investor demand for REITs is causing an intra-asset class shift from direct to indirect real estate. The advantages of REITs and listed real estate stocks over direct real estate include liquidity, corporate transparency, governance, real-time pricing and lower transaction costs. These advantages create a natural preference for REITs and listed real estate stocks, and over time a significant amount of direct real estate is likely to be securitized."