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REITs lower portfolio risk.

Sunday, November 7, 2010

Apart from the attractive combination of income and capital return, REITs also offer diversification advantages. Real estate securities have a low correlation to general equities. This creates significant benefits when it comes to improving the efficiency of investors’ portfolios. It means the increasing of potential returns while at the same time lowering the level of risk, which is the underlying aim of every investor.

Unlike other sectors like tech or commodities, there is also a low correlation between the real estate markets across different countries. While global stock and bond markets tend to move together, real estate is basically determined by local factors and what affects the real estate market in one country will not necessarily affect the markets in other countries.

What is likely to have an impact on all REITs is the interest rate environment. As bond yields rise, the relative attractiveness of REITs tends to fall. This is because many investors, especially institutional ones, value REITs by comparing them with long term interest rates.

Source: UOB Asset Management.

Related post:
High yielding REITs.
Increasing demand for S-REITs.


AK71 said...

By now we should have learned that speculating in houses carries a load of undiversifiable and unrewarded risk. When the housing market crashed it took far too many individual investors with it. Additionally, it’s a huge time sink to manage individual properties. Even if you don’t lose your shirt it may not be worth the effort and aggravation to be a landlord.

REITs offer equity like returns with low correlation to other stocks which make them a potent diversifier for your portfolio with the potential to lower risk in the portfolio while increasing returns. Real estate has always acted differently than the stock market. It goes through its own market cycle, which is characterized by boom and bust periods, most notably commercial real estate in the 80s, and residential in the recent housing bubble.

Using a portfolio of REITs investors can economically and efficiently obtain exposure to real estate in publicly traded, liquid, transparent, daily valued, regulated, audited, securities.

REITs come in a wide variety of flavors. There are REITs that specialize in hospitals and health care, apartment buildings, theaters, office space, shopping malls, or warehouses.


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