Embracing the role of REITs in diversified investment portfolios
The reasons for investing in REITs remain strong
If you are among the vast majority of financial professionals who embrace the use of REITs for portfolio diversification, you already recognize that:
- Along with stocks, bonds and cash, real estate is a fundamental asset class
- REITs are an effective, liquid, and low-cost means of investing in the real estate asset class
Acceptance is widespread and growing
Today, the REIT approach to real estate investing is embraced by:
80% of investment advisors —a significant increase compared to the 73% of surveyed advisors who recommended REITs to their clients in 20161
Leading investment management firms —including BlackRock®, Fidelity® and State Street Global Advisors® who offer REIT-focused products
97% of target date funds —nearly all target date funds have REIT allocations2
Why real estate?
A key asset class
commercial real estate, like stocks, bonds and cash, is a fundamental part of a diversified portfolio that covers the entire U.S. investment market
A distinct economic cycle
relative to the cycle for most other stocks and bonds due, in part, to supply inelasticity
Long-term investment returns
that have provided high and growing income from rents plus moderate capital appreciation over time
Inflation protection attributes
due in part to the fact many leases are tied to inflation and that real asset values have tended to increase in response to rising replacement costs
Performance — The real estate market is the primary driver of REIT returns, therefore REITs may be used as a liquid proxy for gaining access to the entire asset class3
Liquidity — Bought & sold like other stocks, mutual funds and ETFs
Diversification — Low correlation with other stocks and bonds4
Dividends — Reliable income returns5
Key performance statistics through Dec. 31, 2017 include:
*Key performance data for the FTSE Nareit All Equity REITs Index through 12/31/17. For the latest data, visit reit.com/data-research
Guidelines for setting portfolio allocations
WHAT is an appropriate REIT allocation?
The answer will vary based on each investor’s goals, risk tolerance and investment horizon, but here are some guidelines that can help:
Not surprisingly, these percentages are in line with the 17% share of the U.S. investment market represented by commercial real estate.
How does lifestage affect the optimal allocation?
The model below from Wilshire Funds Management7 defines the optimal allocation to U.S. REITs as:
Research by Morningstar® REIT Quick Facts shows:
- Compared to other stocks, bonds and T-Bills, REITs provided the largest increase in wealth over 46 years8
- Adding REITs to a hypothetical portfolio increased returns with no increase in risk9 and reduced the risk of retirees outliving assets10
- REITs have provided stable income despite inflation and market fluctuations9
Download a PDF of this Quick Facts Guide.
How REITs Work
This whiteboard video provides insight into what REITs are and how they work. Watch the video to learn more about the rules that govern REITs and how they operate.
1. Source: Investment News, 2017 and 2018 Outlook Survey of Advisers.
2. Source: Nareit analysis using Morningstar Direct™.
3. Sources: Stock and bond data from Board of Governors of the Federal Reserve, Financial Accounts of the United States, 2016Q4; commercial real estate market size data based on Nareit analysis of CoStar property data and CoStar estimates of Commercial Real Estate Market Size, 2016Q4.
4. Source: CEM Benchmarking, 2017
5. Source: Nareit sponsored study by Wilshire Funds Management - Income Oriented Portfolios - Challenges and Solutions, October 2016.
6. Examples of studies within the stated range include: Ibbotson Associates, Morningstar, and Wilshire Funds Management.
7. Source: Nareit sponsored study by Wilshire Funds Management – The Role of REITs and Listed Real Estate Equities in Target Date Fund Allocations.
Large-cap stocks – Wilshire U.S. Large Cap Index; Small-cap stocks – Wilshire U.S. Small Cap Index; International stocks – Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE®) Index; Emerging Market Equities – MSCI Emerging Markets Index; U.S. bonds - Barclays U.S. Aggregate Bond Index; Non-U.S. bonds – Citigroup Non-USD World GBI; U.S. REITs – FTSE Nareit All Equity REIT Index.
8. For details, refer to Performance: Stocks, Bonds, Bills, REITs, a Morningstar® Fact Sheet available at reit.com/quickfacts
9. For details, refer to The Role of REITs in a Portfolio, a Morningstar® Fact Sheet available at reit.com/quickfacts
10. For details, refer to Retirement Portfolios, a Morningstar® Fact Sheet available at reit.com/quickfacts
11. For details, refer to Dividends and Inflation, a Morningstar® Fact Sheet available at reit.com/quickfacts
IMPORTANT: These facts exclusively address stock exchange-listed Equity REITs. To learn how this type of REIT differs from a Mortgage REIT, and how listed REITs differ from non-listed REITs, see the SEC Investor Bulletin Real Estate Investment Trusts (REITs) available at http://sec.gov/investor/alerts/reits.pdf. REIT investments are not suitable for all investors. Past performance is no guarantee of future results.
Unless otherwise indicated, REIT data presented are historical performance data which are derived from, and apply only to, publicly traded securities.
While such data are believed to be reliable when prepared or provided, such data are subject to change or restatement. Nareit does not warrant or guarantee such data for accuracy or completeness, and shall not be liable under any legal theory for such data or any errors or omissions therein. See http://reit.com/TermsofUse.aspx for important information regarding this data, the underlying assumptions and the limitations of Nareit’s liability therefor, all of which are incorporated by reference. Performance results are provided only as a barometer or measure of past performance, and future values will fluctuate from those used in the underlying data. Any investment returns or performance data (past, hypothetical or otherwise) shown herein or in such data are not necessarily indicative of future returns or performance.
This information is solely educational in nature and is not intended by Nareit to serve as the primary basis for any investment decision. Nareit is not acting as an investment adviser, investment fiduciary, broker, dealer or other market participant and does not intend this publication to be a solicitation related to any particular company, nor does it intend to provide investment, legal or tax advice. Any investment returns or performance data (past, hypothetical, or otherwise) are not necessarily indicative of future returns or performance. ©2018 Nareit® is the exclusive registered trademark of Nareit®.
All other brand names and trademarks referenced herein are property of their respective owners.