Real estate investment is typically viewed as an
essential part of any balanced portfolio. Its immutable characteristics, such as its relatively long pricing cycles and its above average returns, cause real estate to be seen as a stable asset. On the other
hand, due to its sensitivity to interest rates, its lack of liquidity at the property
level and its longer periods appreciation, exposure to the real estate can also serve as an
inflationary hedge. Although real estate exposure may be purchased for any
number of reasons, the risk profile of real estate assets is of interest to
most, if not all, real estate investors.
The ways in which the risk profile of real estate has been
expressed vary from the informal to the highly computational. On the most
informal end of the spectrum, owner-operators of property frequently concern
themselves with the tax consequences and appreciation of the property, content
to face changes in the market or externalities, as they come. On the opposite end of
the spectrum are portfolio managers and fixed-income investors, who seek
quantifiable means to express the volatility of real estate securities. One
such attempt at quantifying the volatility of real estate and its related securities is through the use of real estate's historical beta.