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Introduction
The management of an institutional pension portfolio requires the consideration of a multitude of different, sometimes conflicting, factors. These factors vary from the structure and duration of the liabilities, the regulatory framework that the pension fund is subject to and the different types of investment risks that are to be included in the portfolio. These considerations can be divided into two levels of decisions; the asset allocation decision, i.e. the determination of the relative allocation between asset classes, and the portfolio construction or investment decision, i.e. the identification, acquisition and management of the actual portfolio.
There is ample support in the literature that real estate can improve the risk, return, and liability matching characteristics of an investment portfolio, and as a consequence real estate is a potentially important investment option for an investor (see for instance Hoesli et al., 2004). It is also recognized that real estate is an asset class with a high level of operational resource requirements. These operational aspects have led institutional investors to explore different routes to gain exposure to real estate. Furthermore, there is evidence that the size of the investor has an impact on the cost of managing the real estate exposure (Eichholtz et al., 2010).
To the knowledge of the authors, only a few previous papers have investigated how real estate is viewed from the perspective of the individuals deciding the overall asset allocation. Worzala and Bajtelsmit (1997) find in a survey that the discrepancy between suggested and actual allocation to real estate in part can be explained by different decision-making processes and the size of the pension fund. The purpose of this paper is, through interviews with senior individuals with responsibilities over all asset classes, to increase the understanding of how decision makers’ at large institutional investors reason around real estate in the asset allocation process, how the real estate portfolio is constructed and how the asset allocation decision and portfolio construction process interacts. An understanding of how professionals judge different aspects of real estate in this process is important for improving the understanding of real estate as an investment option. Seven large pension funds have been interviewed on the topic of how the institution handles real estate in the asset allocation process and...