Both DWS and GIC believe that REITs merit a place in a multi-asset portfolio for institutional investors. While fundamentally similar, REITs differ from their private counterparts in terms of liquidity as well as geographic and sectoral breadth. Investors can therefore use REITS to complement private real estate in building a diversified portfolio in a cost- and resource-efficient manner.
REITs play important roles in an institutional portfolio
From a strategic allocation point of view, REITs can be used in conjunction with private real estate on a long-term basis to achieve the desired sectoral, geographic, and property type mix. REITS can also be used to temporarily complete real estate allocations while capital is still in the process of being deployed into private properties.
From a dynamic allocation point of view, REITs can provide investors access to tactical opportunities over the short term, creating additional value. As REITs offer daily liquidity with minimal transaction costs, investors can use them to make tactical adjustments to their overall real estate allocation. REITs can also offer real estate arbitrage-like opportunities between public and private markets.
“Australian investors have started investing in REITs since the early 1970s and consider REITs as substitutes for pure direct property investing as they offer easier liquidity and a chance to own part of a large range of properties. We have noted APAC investors’ usage of REITs to supplement direct property investing as a way to capture market opportunities in between property transactions.”Vanessa Wang, Head of Asia Pacific, DWS.
REITs share characteristics of both equity and real estate
REITs are fundamentally real estate. They own, acquire, develop, sell, and lease properties while their cash flows come primarily from the rents they receive. REITs benefit (or suffer) when their properties’ values increase (or decrease) in the same way as direct real estate investors or private real estate funds. Over longer-term periods, REITs behave very much like real estate, and in fact, the returns of REITS and private real estate have been high correlated over the long-term when adjusted for leverage and liquidity factors.
However, in the short term, the returns of REITs and direct real estate can diverge, sometimes materially. Over a short-term horizon, REITs exhibit equity-like volatility and drawdowns. REITs trade on stock exchanges and are readily available to investors that otherwise would not be able to purchase a property. The intra-day liquidity offered by REITs is one of their greatest benefits when compared to direct real estate as the latter takes time to sell – often months or years.
“Real estate uses and demand drivers continue to evolve. Work from home, e-commerce, aging demographics, and cloud computing are great examples of trends that are writing the next chapter for commercial real estate. Access to deep capital markets has provided REITs the opportunity to be first movers in sectors including storage. Data centres, assisted living, and single family homes to name a few. This dynamism provides investors the ability to augment their private real estate portfolios to both participate in this evolution while still staying aligned to exposure objectives.”John Vojticek, Head and CIO of Liquid Real Assets.
REITs can enhance existing private real estate allocation
It is possible that the combination of listed and private real estate can help increase the expected returns of an investor without changing the expected volatility. However, regardless of any changes to volatility or expected returns, using REITs to complement private real asset allocation does increase a portfolio’s liquidity profile. This liquidity advantage and the potential to expand an investor’s real estate opportunity set are just two benefits which REITs can provide institutional investors.
“Today’s challenging investment environment has increased the attractiveness of using real assets to improve inflation resilience and enhance return diversification in institutional portfolios. REITs can be a part of the toolkit for investors to achieve better medium- and long-term outcomes”.Kevin Bong, Director, Economics, and Investment Strategy, GIC.
“We have confidence in the long-term trends that have supported the growth of the alternatives sector. With our long-standing investment heritage in both private and listed alternatives, DWS is committed to consistently delivering excellence to our clients around the world.”Paul Kelly, Global Head of Alternatives, DWS.