High net-worth individuals' portfolios : private real estate assets

Abstract

The asset allocations of private real estate in the investment portfolios of High Net Worth Individuals (HNWIs) indicate that HNWIs' portfolio returns are not at optimum levels on a risk-adjusted basis. More specifically, utilizing Modem Portfolio Theory, existing allocations to private real estate should, arguably be increased by as much as twice its present allocation. This deficiency is due to insufficient conduits and products available at financial institutions for HNWIs. This mismatch has created a supply and demand problem of HNWI demand for and financial institutions' supply of private real estate assets. The current HNWIs allocations were examined using the "Survey of Consumer Finances" (Federal Reserve, 1998). HNWIs capable of private real estate investment were investors whose net worth was $25 million and above. The HNWI allocations and more than twenty years of historical investment returns and volatilities for financial assets and real estate, were the foundation for analyzing the variance between actual and optimum portfolio allocations of private real estate. This comparison highlighted how the entire HNWI segment could double its current real estate allocation to meet the optimal portfolio level. Along with this real estate allocation deficiency, the HNWI segment has grown substantially over the last 10 years. Since this is a growing segment and a potential source of capital for the real estate industry, this thesis specifically identifies the real estate asset allocation inefficiencies, recommends optimum real estate asset allocations, and lists the alternatives and characteristics of investment conduits and products for increased investment in private real estate by HNWIs.