Why consider adding Global REITs to a balanced investment portfolio?
Guy Barnard: I’d highlight three key reasons for investors to look at global REITs as part of a balanced portfolio allocation. The first is income. Global REITs offer a dividend yield and have demonstrated the ability over time to grow this in excess of inflation.1
The second point I would highlight is diversification. Global REITs (historically) have a low correlation with both bonds and equities over the long term,2 and, in addition, are providing you exposure across many different countries, sectors and thousands of individual real estate assets. This is diversification that is very hard to replicate in most other forms of real estate ownership.
And the final point I would make is around liquidity. Now the REITs sector itself has grown tremendously over time, with a free-float market cap (capitalisation) in excess of US$1.5 trillion (Source: Bloomberg; FTSE EPRA/NAREIT Developed Real Estate Index at 30 June 2019). So this should give investors comfort that they can access global real estate markets in a very cost-efficient manner.
How much should investors consider allocating to REITs?
Greg Kuhl: We have undertaken a portfolio optimisation study that goes back over two economic cycles, more than 20 years. The analysis includes a sampling of asset classes that we find in real-world investor portfolios across equities, fixed income and alternatives. The goal of our analysis was to determine what portfolio allocation over that timeframe would have generated the highest risk-adjusted return, the highest Sharpe ratio. What we found is that the portfolio that did have that best risk-adjusted return had a 10% allocation to global real estate.3
If you study the data a little bit more closely, what you find is that REITs really have tended to perform well and benefit the portfolio in periods of drawdown, or generally stress periods; REITs tend to outperform other asset classes4. To us, that makes perfect sense because we view the key components of real estate as lower correlation with other asset classes, high current income and defensive growth.
What advantages, if any, do REITs offer in an ageing business cycle?
Tim Gibson: Real estate is a real asset class, so it’s connected and linked to the underlying economy. We are, after all, the landlords of the economy. The advantages for REITs: they often have long-duration leases, which can act as a shock absorber and help smooth economic cycles. REITs can also provide a stable and – in today’s case – actually a growing dividend yield. So as we have headwinds of debt, deflation and falling interest rates, this means that REITs can offer defensive characteristics.
1 Source: European Real Estate Association (EPRA). US REIT dividends have outpaced inflation in all but two of the last twenty years between 1998 and 2018.
2Source: European Real Estate Association (EPRA), statistical monthly bulletin as at 28 June 2019. Monthly correlation data for global real estate versus global equities and global bonds from June 1997 to June 2019.
3Source: Janus Henderson Investors as at June 2019. Based on analysis of asset class weights and risk/return characteristics in an optimal portfolio (maximum Sharpe ratio) when the FTSE EPRA Nareit Developed Index is included/excluded from the baseline balanced market portfolio.
4 Source: Bloomberg; MSCI, S&P Citigroup as at 30 September 2019. FTSE EPRA/NAREIT Global Total Return Index (REITs) vs BoFa Global Corporate Bond Index and MSCI Global Equities Index. Total return indices performance rebased to 100 on 30 September 2001 to 30 September 2019.
Past performance is not a guide to future performance. Yields may vary over time and are not guaranteed.
