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.
1. Source: Investment News’ 2018 Outlook Survey of 344 advisers in December 2017
2. Sources: Stock and bond data from Board of Governors of the Federal Reserve, Financial Accounts of the United States, 2018Q4; commercial real estate market size data based on Nareit analysis of CoStar property data and CoStar estimates of Commercial Real Estate Market Size, 2018Q4.
3. Source: CEM Benchmarking, 2019, available at https://www.reit.com/sites/default/files/media/PDFs/Research/NAREITCEMES...
4. Source: Nareit sponsored study by Wilshire Funds Management – Income Oriented Portfolios – Challenges and Solutions, October 2016
5. Source: Cohen & Steers. “REITs: Answering the Call for DC Plan Diversification,” January 2019.
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, 2020 – 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.
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.
REITinvestments 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. ©2019 Nareit® is the exclusive registered trademark of Nareit®.
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