Risk and Returns of Real Estate Held in Pension Funds Investment Portfolios in Kenya

Abstract

In the determination of the optimal investment asset mix, recent research has focused on the contribution of real estate, and what constitutes an efficiently diversified portfolio in which real estate is featured. But while several investment studies analysis of the developed countries markets have shown investment grade real estate assets performance as comparable to that of the other major competing classes, and recommended higher proportions of real estate in investment portfolios than that observed practice has not matched the theory. This is study looks at the performance of real estate compared to quoted stocks and government securities, the other key investment media in the portfolios of pension funds in Kenya. Using data from the pensions sector one of the two major Institutional investors in the Kenyan economy, the study analysis shows risk/returns performance for real estate compares favourably with that on quoted stocks and government securities over the study period 1998 - 2003 With risk and returns rated from the research results as the two leading factors in the choice of Investment avenues the study seeks to allay these investors concerns on real estate assets. However the financial risk more commonly associated with real estate a e that of liquidity and flexibility, is not adequately addressed in the direct form of investment s that is practiced in the local market. Indirect investment in real estate through securitization and secondary mortgage markets has helped overcome the problem of liquidity and flexibility in the developed countries markets. The realization of securitization and listing which would help with the financial deepening of the markets, will however require further studies particularly related to improving this relatively informationally inefficient sectors price discovery framework