What Is the Right REIT Allocation?
REITs increasingly are being included in more meaningful allocations in investment portfolios.
March 9, 2021 | Abigail McCarthy | Wealth Management
Commercial real estate is a core asset class with unique investment attributes and return drivers. This has been demonstrated over time and is the reason that 83 percent of financial advisors in the U.S. recommend REITs.
Investments in REITs are investments in real estate, providing the same long-term real estate returns and diversification benefits. The defined contribution and financial-advisor driven IRA markets are increasingly using REITs to add real estate exposure to diversified portfolios. In the defined contribution market, where the growing use of target-date funds is the dominant investment-related trend, it is estimated that nearly 100 percent of these products feature REIT allocations. Among financial advisors, a Nareit-sponsored survey conducted by market research firm Chatham Partners found that, despite the ongoing pandemic, 92 percent of financial advisors will maintain or increase their recommendation of REITs to their clients in the next one to three years.
The fundamental asset class proposition is based on specific, well-documented attributes of real estate investment, including:
• A distinct economic cycle relative to the cycle for most other equities and bonds due to supply inelasticity, which reduces the correlation of investment returns from real estate with the returns from other assets,
• Competitive, long-term investment returns that potentially provide high and growing income from rents plus moderate capital appreciation over time,
• Potential inflation hedging attributes due in part to the fact many leases are tied to inflation and that real asset values tend to increase in response to rising replacement costs.
