Brad Case

REITs have generally protected against stock market declines, with downside beta typically well below one; moreover, their upside beta has usually been higher, giving investors a chance to “have it both ways.”

December 2018 was bitter for investors. Total returns in the broad REIT market were -7.73 percent—but that was good news compared with large-cap stocks (-9.03 percent according to the S&P 500), small-cap stocks (-11.88 percent for the Russell 2000) and especially small-cap value stocks (-12.09 percent).

Most private equity investment managers measure their performance using IRR, and illustrates how SLOCs and forward commitments can be used to manipulate IRR computations to make performance appear better than it really is. 

It is often said that “correlations spike to one during a crisis,” but REIT-stock correlations have actually been lower during the worst stock market downturns in history, reinforcing the case for REITs as a portfolio diversifier even during crises.

How to construct an inflation-protecting portfolio without exposing yourself to the risk of guessing wrong about an increase the inflation rate.

Investors who depend on commodity investments to protect against inflation risk negative returns if inflation doesn’t meet their expectations, whereas REITs have historically provided strong returns in both high-inflation and low-inflation environments.

Ask anybody which investments “hedge” against inflation, and real estate is one of the three that pretty much everybody will identify, along with commodities and inflation-linked bonds

REIT diversification benefits come not merely from their low correlations to other assets but also from their historically strong risk-adjusted returns. 

REIT returns generally have low correlations with returns from the broad stock market.  Some REIT property sectors—including Health Care, Self Storage, Residential, Infrastructure, and Data Centers—seem to be especially defensive with average correlations of 65 percent or less even during periods encompassing market crises.

It should come as no surprise that the top-performing sector of the REIT market varies through time, suggesting that most investors will want to maintain exposure to every part of the real estate asset class.

REITs have provided that diversification benefit because their underlying returns are driven by the real estate market cycle, which is very different from the business cycle that drives the returns of most other companies in the stock market.

For well over a year now, disappointing REIT returns have been blamed on expectations for rising interest rates, and short-term increases in REIT volatility have been blamed on uncertainty regarding the timing and magnitude of interest-rate changes.