Are REITs underrepresented in your clients’ portfolios?
If you are among the vast majority of financial professionals who embrace the use of REITs for portfolio diversification1, you already recognize that:
- Commercial real estate is a fundamental asset class representing 17% of the U.S. investment market2
- REITs are an effective and liquid means of investing in this asset class, allowing your clients to build a diversified portfolio that covers the entire U.S. investment market
- Commercial real estate can bring unique attributes to a portfolio including
- A distinct economic cycle relative to most other stocks and bonds
- Potential inflation protection
The significance of commercial real estate should not be underestimated
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
REITs are real estate working for you
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 class2
Liquidity — Bought and sold like other stocks, mutual funds and ETFs
Diversification — Low correlation with other stocks and bonds3
Dividends — Reliable income returns4
Simplicity - Compared with alternatives, REIT investing is straightforward and transparent, so investors may be more likely to understand and utilize REITs in their portfolios5
What is an appropriate allocation to REITs?
The answer will vary based on each investor’s goals, risk tolerance and investment horizon, but here are some key insights that can help:
- Multiple studies have found that the optimal REIT portfolio allocation may be between 5% and 15%.6
- David F. Swensen, PhD, noted CIO of the Yale endowment and author of Unconventional Success: A Fundamental Approach to Personal Investment, recommends a 15% allocation to REITs for most investors.
Further insight comes from Princeton Economics Professor Burton Malkiel, PhD who suggests that a long-term investor saving for retirement should consider a portfolio that is heavily equity-oriented, with a meaningful portion of their equity investments focused on real estate.
How does lifestage affect the optimal allocation?
As this Wilshire Funds Management Glide Path Model shows, an optimal allocation for certain investors could start at 15%+ for an investor with a 45-year investment horizon, gradually declining to 7%+ at retirement and 6%+ after 10 years in retirement.7
Looking closer at REIT performance
Here’s what these Morningstar® Fact Sheets reveal about past REIT performance for the 48-year period ending December 31, 2019 (the longest period for which data are available):
- Largest increase Compared to bonds, T-bills and other stocks, REITs provided the largest increase in wealth in 48 years.
- Increased returns Adding REITs to a hypothetical portfolio increased returns with no increase in risk.
- Extended lifespan Adding REITs to a hypothetical portfolio reduced the risk of outliving assets for retirees.
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.