With Capital Comes Volatility

The increased volatility of REIT returns has occurred as the byproduct of their growing access to capital, according to Jon Cheigh, portfolio manager with investment firm Cohen & Steers Capital Management.

In a video interview at REITWise 2012®: NAREIT's Law, Accounting & Finance Conference in Hollywood, Fla., Cheigh discussed the state of the capital markets, as well as the role of REITs in investors' portoflios. He said REITs currently enjoy access to numerous forms of capital.

"We're seeing REITs take advantage of lots of different forms of capital, and it has continued to be very efficient. I wouldn't say it has been 'cost-less,' but there's a lot less friction than there used to be," Cheigh said. "People will look at the volatility at the margin of REITs being higher than 10 years ago. Frankly, that's a little bit of a consequence to having all of this access to capital. That's part of being part of the global capital market."

Whereas REITs were once primarily viewed as a segment of an investment portfolio's real estate allocation, they're playing a more diverse role today, Cheigh said. Attributes of REIT investment have become appealing as part of broader allocations as well, according to Cheigh. Those include strong yields that should outpace the level of inflation. Given the strength of their dividends, Cheigh said, more investors are turning to REITs as an alternative to bonds or other fixed-income instruments.

"We're seeing REITs being put into very big asset allocation programs, not as a replacement or substitute for real estate, but as a replacement or substitute for all different kinds of asset classes," Cheigh said.

Regarding attractive sectors of the REIT market, Cheigh said his firm is high on "higher-end" regional malls. The growth in the highest levels of household income bode well for this sub-sector, according to Cheigh. They're also benefitting from international tourism, he said. Additionally, whereas the rise of e-commerce has served to displace a wide swath of bricks-and-mortar retailers, higher-end malls are in better position to defend against that threat and are poised to take advantage of the consolidation in retail sites.