The asset allocation of sustainable real estate: a chance for a green contribution?

Abstract

Purpose

Given the growing market awareness concerning responsible investments in recent years, the purpose of this paper is to bridge the gap between real estate companies which implemented a corporate social responsibility (CSR) agenda and the possible role within a multi‐asset portfolio optimisation framework. The behaviour of the asset class sustainable real estate (SRE) together with its diversification characteristics are the main focus.

Design/methodology/approach

The study is an explorative empirical analysis applying a portfolio optimisation algorithm. First, the authors developed a sustainable real estate index comprehending listed real estate companies from 2004 until 2010 acting in line with a CSR agenda. Second, the authors introduced SRE into the opportunity set of an UK investor and finally, generated the theoretical optimal asset allocation of SRE within different risk‐return portfolios.

Findings

The unique risk‐return pattern of SRE enables the asset class to be allocated across all portfolios ranging from low to high risk along the efficient frontier. In the low‐risk levels, SRE behaves as a diversifier whereas in the medium‐ to high‐risk portfolios SRE is represented as the main allocated asset. Sustainable real estate thus offers opportunities to numerous investors in view of their investment preferences and corporate strategies.

Practical implications

The results could encourage institutional investors to take investments in CSR‐driven listed real estate companies into account and to rethink their strategic asset allocation approach in view of the identified asset characteristics and the behaviour within a portfolio framework.

Originality/value

The paper provides a first insight in the field of portfolio management by introducing SRE into the opportunity set of a UK investor. The study raises SRE to an aggregated level and delivers theoretical as well as empirical evidence of the role sustainable real estate is playing within a multi‐asset portfolio.

Citation

Geiger, P., Cajias, M. and Bienert, S. (2013), "The asset allocation of sustainable real estate: a chance for a green contribution?", Journal of Corporate Real Estate, Vol. 15 No. 1, pp. 73-91. https://doi.org/10.1108/JCRE-11-2012-0029