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How do Non-Core Allocations Affect the Risk and Returns of Private Real Estate Funds?

DOI:10.1007/s11146-022-09886-0
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Spencer J. Couts
Spencer J. Couts
Spencer J. Couts
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This paper documents that funds with greater non-core allocations have higher market risk exposure, β, but lower returns. Additionally, it documents that one reason their returns are lower is because they poorly time their investment into these properties. Open-end private real estate funds have higher non-core allocations at the top of the market and lower allocations at the bottom. As such, these funds are disproportionately exposed to the downside of the market. Lastly, I find that reaching for yield and fund flow pressure are important determinants of this phenomenon. Funds buy relatively more non-core properties when either the market return expectations or their net queues are smaller. Buying more core properties when queues are larger enables managers to place capital quicker, but it also hurts existing investors by decreasing their market risk exposure at the time when it is the most desirable and beneficial.
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Journal of Real Estate Finance & Economics
https://doi.org/10.1007/s11146-022-09886-0
How do Non-Core Allocations Affect the Risk
and Returns of Private Real Estate Funds?
Spencer J. Couts1
Accepted: 4 January 2022
©The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2022
Abstract
This paper documents that funds with greater non-core allocations have higher mar-
ket risk exposure, β, but lower returns. Additionally, it documents that one reason
their returns are lower is because they poorly time their investment into these prop-
erties. Open-end private real estate funds have higher non-core allocations at the top
of the market and lower allocations at the bottom. As such, these funds are dispro-
portionately exposed to the downside of the market. Lastly, I find that reaching for
yield and fund flow pressure are important determinants of this phenomenon. Funds
buy relatively more non-core properties when either the market return expectations
or their net queues are smaller. Buying more core properties when queues are larger
enables managers to place capital quicker, but it also hurts existing investors by
decreasing their market risk exposure at the time when it is the most desirable and
beneficial.
Keywords Asset pricing ·Risk factors ·Factor loadings ·Commercial real estate
JEL Classification G11 ·G12 ·G13 ·G14 ·G23 ·R33
I am grateful for comments and advice from two anonymous referees, Zahi Ben-David, Brad Cannon,
Moussa Diop, Jeffrey Fisher, Richard Green, Andrei Gonc¸alves, Dongxu Li, Crocker Liu, Haoyang
Liu, C. Jack Liebersohn, David Ling, Greg MacKinnon, Gianluca Marcato (discussant), Andri
Rabetanety (discussant), Andrea Rossi, Ren´
e Stulz, Chongyu Wang, Michael Weisbach, and Lu
Zhang as well as seminar participants at the 2020 Real Estate Finance and Investment Symposium,
the 2020 UNC Commercial Real Estate Data Association Real Estate Research Symposium, the 3rd
Annual REALPAC/Ryerson Canadian Commercial Real Estate Research Symposium (2020), and
the Annual Private Markets Research Conference (2019). All errors are my own.
Spencer J. Couts
couts@usc.edu
1Lusk Center of Real Estate, University of Southern California, 319 Ralph & Gold Lewis Hall,
650 Childs Way, Los Angeles, CA 90089, USA
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
ResearchGate has not been able to resolve any citations for this publication.
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