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1 Introduction
Institutional investors including pension funds in Europe and elsewhere have increased their commitments in indirect real estate investment vehicles, mainly private equity real estate funds, over the past few years. According to INREV[1] , the amount of capital commitments raised in Europe over 2005-2008 was [euro]54.2 billion. [12] INREV (2009) shows that fund managers raised [euro]10.2 billion in Europe in 2008 compared to [euro]19.0 billion raised in the peak year of 2007. The global fundraising of value-added and opportunistic real estate funds over 2005-2008 was $349.8 billion compared to $84.2 billion raised during the preceding four-year period of 2001-2004 according to data collected by Preqin[2] (Figure 1 [Figure omitted. See Article Image.]). Based on these data, the number of funds raised almost tripled from 217 to 605 from the earlier period to the more recent years and the average fund size grew from $388 to 578 million.
The benefits of adding real estate in an investment portfolio have been documented widely, e.g. by [24] Stevenson (2004) and [15] Lee and Stevenson (2006). Studies have shown that real estate can provide both diversification benefits and reduce overall risk of a multi-asset portfolio. Real estate can also provide hedge against inflation in addition to potentially providing attractive returns which have been reported to exceed bond returns and at times being competitive with equity returns ([6] Darst, 2003). Property can be seen as a true third asset class, separate from equities and bonds because it is a physical asset and requires regular management and maintenance, its income stream is governed by long contracts, and the supply side is regulated complicating the effects of economic forces ([2] Baum, 2002). Still the performance of real estate is, like all assets, ultimately linked to the performance of the economy and capital markets. Like in equities, international diversification has been shown to have positive characteristics, e.g. by [1] Ball et al. (1998). The individual real estate markets, typically very local by nature, have their own supply and demand drivers and the correlation of rental growth, property yields and returns have been relatively low between different countries and markets. The latest shock that has faced the real estate markets has been capital markets driven and has not left almost any...