Is there a real estate factor premium?

In this paper, we study the variation of expected returns on five different asset portfolios in a multi-factor model. We found the presence of a real estate factor, in addition to both a stock factor and a bond factor in asset pricing. This suggests that mutual fund managers should seriously consider including real estate assets in their portfolios, since one cannot capture the real estate factor premium without having some kind of real estate exposure. Another result is that the market segmentation found in previous studies disappears in a more general model of asset pricing in which we allow for multi-factors other than the market factor to affect asset returns. This implies that real estate assets can be treated just like other assets as far as mean-variance efficient asset allocations are concerned. We also have some preliminary evidence that equity REITs and the Russell-NCREIF index are driven by the same underlying real estate factor.