REIT Correlations Decrease Over Longer Investment Horizons

6/1/2011 | By Matt Bechard
NAREIT Senior Vice President of Research and Industry Information Brad Case researched the correlation between REITs and the broader stock market and found that REITs continue to be a great source of portfolio diversification for investors with long investment horizons.

"When you look at REIT returns over one-quarter periods, or two-quarter periods or three or four-quarter periods, the correlation between REITs and the rest of the stock market actually goes down when you have longer investment horizons," Case said.

The reason for that, Case said, is in part because many REIT investors are using ETFs or mutual funds that also include non-REIT stocks. For example, Case said REITs are classified within the financial sector even though they are not really financial companies.

"That means if other investors are trading a financial sector ETF or mutual fund on the basis of information about, for example, banks, that may cause the short-term correlation between REITs and the rest of the stock market, including banks, to be high," Case said. "But then, knowledgeable investors will recognize that REITs may be under-priced or over-priced because they have been pulled in one direction or the other by non-REIT information. That gives investors a chance to make money by trading REITs back to where they should be regardless of what is happening with the rest of the stock market."

Case said correlations increase with every other part of the stock market over longer-term investment horizons. He said that means as mispricings in every other part of the stock market are corrected; the other parts of the stock market look more and more like each other.

"Whereas with REITs, as mispricings are corrected REITs look less and less like the non-REIT part of the stock market," Case said.

Using monthly data, Case said the long-term average correlation between REITs and the rest of the stock market is about 55 percent. He said that number was lower 10 or 15 years ago, around the 30 percent range, and has risen in the last several years since the liquidity crisis to around 71 percent.

Case said it is important for investors to realize that REITs are truly part of the real estate asset class traded through the stock market.

"Fundamentally, if you are talking about two different asset classes you are talking about two different groups of assets whose values respond to different sets of signals," Case said. "So, REITs, even though they are traded within the stock market, are a way for investors to access a different real estate asset class because REIT stock prices are affected by signals about the value of commercial properties."

Investors who understand that can take advantage of mispricings as well as build a well-diversified portfolio that still performs well without a great deal of portfolio level volatility, Case said.

COMMENTS

plus_icon
No Comments To Display.
Showing 0 to 0 of 0 comments | Previous | Next
User Name:
Comment:
Enter Code: *
Thank you for your comment.

Please click here to add more comments.

IN NEWS

video

Fundamentally Speaking: Federal Reserve Policy Unlikely to Change Soon

5/22/2013
video

Shoppers Want More from Malls

5/22/2013
video

Europe Real Estate Debt Funds Aggressively Pursuing New Capital, Study Says

5/17/2013
video

Fitch Ratings Says CMBS Delinquencies Lowest in Five Years

5/16/2013
video

Property Values Hovering Around Market Peaks

5/13/2013
video

Book Offers ‘Road Map’ to REIT Investing

5/10/2013
video

Brookfied-Office-Properties-Focused-on-Reducing-Carbon-Footprint

1/1/0001
video

Book Offers ‘Road Map’ to REIT Investing

5/10/2013
video

Reimbursements, Care Level Dominant Themes for Health Care REITs

11/20/2012
video

Leader in the Light and GRESB Advance Sustainability in Commercial Real Estate

5/3/2013
video

Macerich Added to S&P 500 Index

5/8/2013
video

Property Values Hovering Around Market Peaks

5/13/2013

FEATURED

arrow
arrow