Globalization

Following the lead of the United States, many countries around the world have established REIT regimes during the last 40 years. The same attributes that have driven the growth of REITs in the U.S.‑diversification, dividends, transparency, liquidity and performance‑are fueling the growth of publicly traded real estate throughout the world.

 

Countries that have adopted REIT-like structures range from established financial environments, such as the United Kingdom and Japan, to emerging markets like Taiwan and Malaysia. At the end of 2007, the FTSE EPRA/NAREIT Global Real Estate Index—a leading measure of global real estate performance—consisted of nearly 300 companies spread across more than 20 countries, with a total market capitalization of approximately $800 billion.

 

This expansion of publicly traded commercial real estate worldwide has left investors with an ever-growing set of opportunities to further diversify their portfolios. For example, based on monthly total returns from 1997 to 2007, global equity REITs have demonstrated lower correlation to the Wilshire 5000 than the vast majority of global equity investments.

           

Like U.S. REITs, global listed real estate has proven to provide an attractive mix of diversification and risk-adjusted performance. Between 1992 and 2007, both domestic and foreign REITs demonstrated a combination of high Sharpe Ratios and low correlation with the broader market that few investment vehicles could match.

 

Source: NAREIT. IDP and FactSet.

As a result, it seems clear a well-balanced, strong-performing investment portfolio should dedicate a significant allocation to global real estate, including U.S. REITs. Consider an Ibbotson analysis of an efficient global portfolio with 10 percent volatility.

 

 Source: Ibbotson Associates.

 

Based on historical returns, Ibbotson found that an efficient portfolio would contain a 33 percent allocation to global real estate, including a 20 percent allocation to North American real estate. However, looking at historical returns is only part of the picture. Ibbotson’s portfolio based on forward-looking returns, which takes into consideration the idea that investors expect to be compensated for increased levels of risk, allocates 23 percent of its holdings to global real estate, global real estate investment is a key component of a balanced portfolio, and investment in North American real estate remains a central component (approximately 50 percent) of an overall global real estate allocation.