Case Study Background You are an investment consultant retained to advise a mid-size university endowment fund about commercial real estate investment. You are to prepare a report which addresses several questions on real estate investment (listed in the next section) raised by the university’s investment committee. Research questions At its most recent meeting the Investment Committee of XYZ University has decided to investigate allocating a portion of the university’s endowment to commercial real estate. The committee has no previous experience of investment in this area and requires further information before committing investment funds to this sector. In particular, they wish to have your advice on the following questions:

(1) What are the main investment sectors of the commercial real estate market usually considered by institutional investors?

(2) If this fund wishes to allocate $200-400m to this sector, is this sufficient to build a diversified portfolio of commercial buildings?

(3) Advise the fund on the main advantages and disadvantages of investing in REITs as opposed to buying commercial real estate buildings directly.

(4) The endowment fund is already heavily invested in US equities, provide evidence on the average return, variance and covariances of direct real estate with REITs, equities and bonds.

(5) Provide your assessment of the outlook for the commercial real estate market relative to other classes.project. Year NCREIF Property Index Returns Return on S&P 500 Index (include dividends) Bond Index – Total Return CRSP/ZILMAN?SNL REIT INDEX

19881

19882 2.00 5.64 0.84 2.25

19883 2.39 -0.58 1.70 0.65

19884 3.07 2.14 0.83 -2.57

19891 1.75 6.18 1.09 -1.41

19892 2.00 7.84 7.87 4.60

19893 2.05 9.80 0.79 1.44

19894 1.75 1.22 3.70 -5.96

19901 1.38 -3.81 -1.13 -5.87

19902 1.52 5.32 3.34 -0.57

19903 0.84 -14.52 1.04 -13.65

19904 -1.43 7.90 5.24 3.60

19911 0.05 13.63 1.93 23.43

19912 0.01 -1.08 1.44 2.70

19913 -0.33 4.50 5.47 4.12

19914 -5.33 7.54 5.27 5.19

19921 -0.03 -3.21 -1.62 -0.30

19922 -1.03 1.10 3.97 1.68

19923 -0.44 2.37 4.90 4.89

19924 -2.81 4.29 -0.05 4.36

19931 0.77 3.66 4.32 17.14

19932 -0.24 -0.25 2.65 -2.46

19933 1.10 1.86 2.96 8.42

19934 -0.25 1.64 -0.18 -5.07

19941 1.31 -4.43 -2.70 2.35

19942 1.54 -0.34 -0.98 1.62

19943 1.51 4.15 0.56 -1.34

19944 1.88 -0.74 0.21 -0.99

19951 2.11 9.02 4.58 1.28

19952 2.08 8.80 5.82 6.13

19953 2.06 7.28 1.70 4.94

19954 1.09 5.39 4.28 4.54

19961 2.40 4.80 -1.85 3.14

19962 2.29 3.89 0.48 3.77

19963 2.63 2.49 1.66 6.58

19964 2.61 7.77 2.77 18.05

19971 2.34 2.21 -0.70 0.72

19972 2.82 16.91 3.50 5.73

19973 3.38 7.02 3.42 10.90

19974 4.71 2.44 3.36 0.44

19981 4.14 13.53 1.50 -0.07

19982 4.19 2.91 2.70 -4.36

19983 3.46 -10.30 5.77 -10.84

19984 3.55 20.87 -0.05 -3.28

19991 2.59 4.65 -1.70 -4.50

19992 2.62 6.71 -0.99 10.56

19993 2.81 -6.56 0.66 -9.78

19994 2.89 14.54 -0.65 -1.54

20001 2.40 2.00 2.40 2.05

20002 3.05 -2.93 1.71 11.23

20003 2.94 -1.24 3.03 6.96

20004 3.33 -8.09 4.47 3.92

20011 2.36 -12.11 3.02 0.93

20012 2.47 5.52 0.44 11.32

20013 1.60 -14.99 4.77 -3.98

20014 0.67 10.29 -0.04 6.09

20021 1.51 -0.06 0.05 9.12

20022 1.61 -13.73 3.79 4.83

20023 1.79 -17.63 4.84 -9.70

20024 1.67 7.92 1.68 1.02

20031 1.88 -3.60 1.31 0.81

20032 2.09 14.89 2.43 14.31

20033 1.97 2.20 -0.10 9.45

20034 2.76 11.64 0.29 10.42

20041 2.56 1.29 2.70 12.57

20042 3.13 1.30 -2.46 -5.94

20043 3.42 -2.30 3.36 7.84

20044 4.66 8.73 1.05 15.16

20051 3.51 -2.59 -0.47 -7.09

20052 5.34 0.91 3.20 12.86

20053 4.44 3.15 -0.65 1.66

20054 5.43 1.59 0.61 1.91

20061 3.62 3.73 -0.70 13.66

20062 4.01 -1.90 -0.12 -1.08

20063 3.51 5.17 3.90 8.62

20064 4.51 6.17 1.26 9.50

20071 3.62 0.18 1.52 2.08

20072 4.59 5.81 -0.64 -8.68

20073 3.56 1.56 3.06 0.04

20074 3.21 -3.82 3.17 -11.68

20081 1.60 -9.92 2.69 -1.04

20082 0.56 -3.23 -1.15 -4.97

20083 -0.17 -8.88 -0.11 4.56

20084 -8.29 -22.56 6.07 -36.74

20091 -7.33 -11.67 0.27 -29.63

20092 -5.20 15.22 1.23 27.25

20093 -3.32 14.99 3.49 31.43

20094 -2.11 5.49 0.86 8.16

20101 0.76 4.87 1.72 9.46

20102 3.31 -11.86 3.83 -3.95

20103 3.86 10.72 3.39 12.30

20104 4.62 10.20 -2.16 7.91

20111 3.36 5.92 -0.01 7.10

20112 3.94 0.10 0.04 3.19

20113 3.30 -13.87 0.21 -15.15

20114 2.96 11.82 0.03 15.53

20121 2.59 12.59 -0.05 10.72

20122 2.68 -2.75 0.10 4.10

20123 2.34 6.35 0.00 1.11

20124 2.54 -0.38 -0.01 3.17

20131 2.57 10.61 -0.01 8.16

20132 2.87 2.91 0.07 -1.85

20133 2.59 5.25 0.04 -2.42

20134 2.53 10.51 0.00 0.13