DWS and GIC co-publish paper on the role of REITs in Real Estate Allocations

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.

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.   

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.