This week, we’re casting our eye over the world of Real Estate Investment Trusts, or REITS – what are they and what are some of the ideas behind this asset class?

As the title suggests, REITs are investment vehicles that acquire and, in most cases, operate and finance real estate assets. They were established in the 1960s in the US to give investors, big and small, easier access to the real estate market. Collectively, REITs of all types own more than $3.5 trillion in gross assets across the US, encompassing a wide scope of real estate property types, including offices, apartment buildings, warehouses, retail centres, medical facilities, data centres, cell towers, infrastructure and hotels.

Often listed and enjoying very high liquidity, REITs also claim an exemption from income tax and are generally tax efficient investment vehicles, making them a highly attractive asset class in the US over the past 60 years. The model is spreading globally and has since been adopted by 40 other countries.

For investors, it’s important to understand where REITs could fit into their portfolio. Historically, REITs demonstrate a correlation of 0.7 with Global Equities and 0.4 with Global Bonds – meaning they are a useful diversifier. Currently, REITs are on average offering a dividend yield of 3.3%, which compares favourably to what you might get from S&P 500 dividend yields.

With inflation angst back, potentially endangering equity and bond investment returns, investors are increasingly seeking out asset class diversification, including real assets, such as commodities, infrastructure and property. Both in terms of total return and dividend growth, REITs outperformed inflation over the past 20to 30 years, except during market crises (notably the Great Financial Crisis, which was triggered by a real estate collapse).

Of note to inflation hawks will be the data showing that, between 1990 and 2020, REITs outperformed equities in periods of moderate to high inflation (ie. >2%). When inflation was below that threshold, equities outperformed.

As this newsletter has reported many times, it’s not yet clear where inflation is headed over the next 12-18 months. But if inflation does head towards persistently higher levels, it could make sense to integrate REITs into a globally diversified portfolio. A number of ETFs and actively managed funds offer opportunities to ensure sectoral and geographical diversification with any investor’s allocation of REITs.