In this article we compare public and private real estate equities. In so doing, we control for three of the main differences between these investment alternatives: property-type mix, leverage and appraisal smoothing. With these two restated indices, we then run tests to determine in a statistical sense whether the restated means and volatilities of the two series were different from one another. The clear answer is that they were not. The results of the statistical tests combined with the fact that the average difference between the two (restated) return series has substantially narrowed (to approximately 60 basis points) in the more recent (1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001) period jointly suggest a seamless real estate market in which public-and private-market vehicles display a long-run synchronicity. This has important implications for portfolio management. First, public-and private-market vehicles ought to be viewed as offering investors a risk/return continuum of real estate investment opportunities. Second, while the "platform" did not matter in terms of observed return characteristics, the platform may matter with regard to liquidity, governance, transparency, control, executive compensation and so forth; an apparent clientele effect hints at these issues being valued differently by large and small investors.Returns on publicly traded real estate investment trusts (REITs) have typically exceeded the returns on private real estate equities by approximately 5% per annum. For example, when returns are observed over the 21-year period ended in 2001, REIT returns (as proxied by the National Association of Real Estate Investment Trusts, or NAREIT, Index) averaged 13.5%, while private real estate returns (as proxied by the NCREIF Property Index, or NPI) have averaged just 8.4%. This performance difference of approximately 500 basis points raises the question: Is this differential attributable to some underlying structural reason (e.g., optimal contracting issues, the efficiency of public markets, etc.) or is it just happenstance? In short, does the "platform" (i.e., the format of the legal entity used to hold the assets) matter? This article attempts to examine rigorously this question.

This article examines real estate's role in institutional mixed-asset portfolios using both private-and public-real estate indices, as a means of examining varying real estate-related risk/return opportunities. In so doing, this article also examines the effects of: (1) increasing the investment horizon, (2) placing constraints on the maximum allocation to any one asset class, and (3) varying the risk preferences of investors. The empirical results suggest-using infinitehorizon returns and all of the caveats that accompany such a perspective-that real estate allocations of approximately 10-15% of the mixed-asset portfolio represent an upper bound for most investors. For those investors preferring low-risk portfolios, (unlevered) private real estate is the vehicle serving this allocation preference; for those investors preferring high-risk portfolios, public real estate (with its embedded leverage of 40-50%) is the vehicle serving this allocation preference-with such vehicles serving as substitutes for a variety of noncore real estate strategies. In some sense, the distinction between private and public real estate is more about the use of leverage. For those investors preferring moderate-risk portfolios, an intermediate-leverage approach seems optimal.

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Real estate strategies broadly fall into three categories: core, value‐added and opportunistic. This empirical examination of net returns from these three strategies indicates that, on a risk‐adjusted basis, the value‐added funds have strongly underperformed and the returns from opportunistic funds have weakly underperformed the returns available from core funds. In so concluding, this article departs from standard asset‐pricing models in two important respects: the total risk is used and the cost of borrowing increases as leverage increases. While the first departure has no substantive effect, the second departure lowers the estimate of the underperformance of noncore funds.