Can anyone touch on this point? NCREIF index is based on property appraisals rather than market values. Appraised values tend to be less volatile than market values, an effect known as smoothing. As a result of smoothing, volatility and correlations with other assets will tend to be understated, which means an oerstatement of the benefits of real estate in the portfolio. Using the unsmoothed NCREIF index gives a more accurate picture of the benefits of real estate investment. So is what I’m reading: The diversification benefits of indirect real estate are overstated (i.e. correlations are lower than actual) where direct real estate is not. I assumed the diversification benefits of direct real estate also suffered from bias due to the low transparency in information and lack of frequency in appraisals (a similarity to private equity) but CFAI seems to be counting this out. Any thoughts?
I have been reading this right now, and the low appraisal frequency is mentioned as a factor in the smoothing effect (Pg 16). It does not mention the lack of transparency but it is mentioned as a disadvantage of real estate investment.
Isn’t the NCREIF a direct investment?
Okay, want to make sure that I’m not reading too much into this. CFAI says - Historically, real estate investment (direct) has experienced lower volatility than other asset classes because it is typically less affected by short-term economic conditions. My take on this is that the lower short-term volatility relative to stocks & bonds is because of the infrequency of appraisals and therefore its low/negative correlation with stocks & bonds might actually be higher (i.e. biased downward) Why isnt this the same for REITs and indirect? Whats the difference between indirect and direct real estate in terms of appraisals and their benchmark biases? So I guess a better question is: what is the difference in biases among NAREIT, NCREIF, NCREIF unsmoothed?
many reits are publicly traded with daily price fluctuations.