It is commonly presumed that the trade-off between risk and return provided by both direct real estate investments and real estate funds is approximately linear — in other words, that the marginal return per unit of risk is broadly stable at all levels of risk. This concept is illustrated in the chart below. Fund marketing documents often use this approach to illustrate the risk and return choices available to real estate investors.

This article looks at two approaches to review the assumptions underlying this trade-off. First, data from the 2007 index of unlisted fund performance produced by INREV, the European Association for Investors in Non-listed Real Estate Vehicles, are used to identify risk per unit of return from core, value-added and opportunity funds. Second, a hypothetical model using Monte Carlo analysis is developed to characterise returns by style.

The article is divided into three fur