This study explores real estate allocation in the investment portfolio decision from the position of an institutional investor, specifically a pension fund. We apply Sharpe and Tintís (1990) investment framework with an explicit link between investment opportunities and pension-plan obligations. This investment model arises from a traditional mean-variance asset-only optimization but also maximizes utility while incorporating liabilities. It allows for varying emphasis levels on liabilities, funding levels and risk tolerance and measures the relationship among expected returns, risk and liability hedging characteristics. The liability hedging characteristic summarizes the assets impact on the pensions fundís future funding surplus and thus quantifies the utility that investors with liabilities can derive from different asset classes. Moreover, we widen the investment opportunity set by distinguishing between direct and indirect real estate investments while broadening the empirical setting by looking beyond US allocations.