When I was writing this column one year ago, I tried to sum up what was an extremely challenging year for the industry and country as a whole.
“We all hope 2021 marks a return to an environment with less uncertainty, economic recovery for all people, better health for our communities, more inclusivity in our culture, and lasting positivity in our country. But no matter what challenges or opportunities lie ahead, the past six decades have shown that REITs will be there to help us adapt and enhance our daily lives.”
Replace “2021” with “2022” and the sentiment is as true today as it was a year ago.
While the pandemic still presents substantial challenges, the REIT industry continues to persevere and remain true to its original mission: to allow all investors, notably small investors, the ability to access the benefits of income-producing real estate. Over the years and many economic cycles, it has become a widely accepted view in the investment community that commercial real estate is a core asset class with unique investment attributes and return drivers, and an investment in REITs is an investment in real estate.
Recently, a series of research reports have further quantified the historical portfolio benefits of REIT allocations and the growing acceptance and investment in REITs as a core asset class.
A survey conducted by Chatham Partners found that 83% of financial advisors invest their clients in REITs, and the most frequently referenced attribute they cite is “portfolio diversification.” The study showed that financial advisors understand the importance of meaningful REIT allocations—irrespective of the client’s age—from early career through retirement.
A separate analysis of the performance of real estate investments held by 200 of the largest U.S. pension funds shows that these financial advisors are likely offering sound advice. The study, by CEM Benchmarking, illustrated that REITs have continued to outperform unlisted real estate investments over a more than two-decade period, delivering higher returns for pension funds. However, despite their strong performance the study found that many pension funds may still be missing out on REIT benefits by under-allocating to them in their real estate strategy.
Yet another recent study sought to clarify how much of a portfolio should be allocated to REITs. The Morningstar Associates analysis shows that the inclusion of REITs in a portfolio increases the return for a given level of risk. Morningstar’s research found that the optimal portfolio allocation to REITs ranges between 4% and 13%, consistent with a number of studies that support a REIT portfolio allocation between 5% and 15%.
No matter what 2022 holds, there is one thing we can be certain of—that the REIT approach to real estate investment will continue its historical role as an important part of all investment portfolios.