Journal of Real Estate Finance and Economics, 19:3, 193±210 (1999)
# 1999 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Determinants of Real Estate Asset Allocations in
Private and Public Pension Plans
BRIAN A. CIOCHETTI
University of North Carolina, Department of Finance, Chapel Hill, NC 27599-3490
University of Iowa, College of Business Administration, Iowa City, IA 52242
JAMES D. SHILLING
University of Wisconsin, School of Business, Madison, WI 53706
Numerous studies have examined the factors associated with allocation of corporate and government pension-
plan assets. Yet to date there has been no attempt to identify the sponsor-related conditions that affect the
percentage of U.S. private and public pension-fund assets invested in real estate. The purpose of this article is to
examine various asset-and liability-matching hypotheses regarding pension-plan asset allocations. Models are
speci®ed for both corporate and government de®ned-bene®t plans that relate the characteristics of each plan to the
percentage allocated to real estate investments. Our results con®rm the existence of a signi®cant size effect for
both corporate and government pension plans, although we ®nd mean levels of real estate allocation to be much
lower than those suggested in previous real estate allocation studies. The article, however, contains some
anomalous ®ndings. In particular, our ®ndings suggest that pension-plan sponsors do not hedge their real estate
risk. We also ®nd that pension-plan sponsors do not invest in real estate, as theory might suggest, to minimize the
noise level in their pension liabilities.
Key Words: pension funds, real estate, asset allocation, portfolio allocation
Pension-plan investment in real estate is extremely limited and much smaller than one
would expect based on most mean-variance portfolio models. Indeed, studies by
Firstenberg, Ross, and Zisler (1988), Fogler (1984), Hartzell, Heckman, and Miles (1986),
Ibbotson and Siegel (1984), Miles and McCue (1984), and Ennis and Burik (1991) among
others suggest that, if pension plans care only about the mean and the variance of the real
return on their invested wealth, they should invest between 15 to 20 percent (or higher) of
their assets in real estate.
All the available data on ownership of real estate, however,
shows that pension plans hold between 3.5 to 4 percent of their assets in real estate.
Several explanations for this anomaly may be offered. One explanation is that there are
signi®cant barriers to entry. While this explanation helps explain why most small-scale