REITs - Sector in Brief
Noting a rise in client demand for REITs, we explore some of the recent developments in this sector and highlight key implementation considerations.
IN THIS PAPER
Investment appetite. Activity in REITs has been driven by the increasing sophistication and granularity of investors' portfolios, influential regulatory/industry changes, and a stronger understanding of diversification characteristics.
Understanding returns. The "rates up, REITs down" paradigm is holding, with fundamentals continuing to exert little influence on overall valuations.
Active manager performance. While funds are delivering substantial excess returns, considerable dispersion makes manager selection critical.
Through 2018 and into early 2019, we observe a rise in appetite for REITs among pension funds. To some extent this demand was supported by valuations: this sector was relatively cheap in 2018 and clients that entered have benefited from the subsequent performance surge. Yet there are also underlying long-term factors at play.
It is now increasingly common to find unlisted real estate and REITs side by side in investors' portfolios, with REITs often functioning as a "completion portfolio" given the degree of specificity available. New ESG and Sharia-compliant products are making the sector accessible to relevant buyers, as are regulatory changes in countries such as Germany. We hope that this brief research note proves helpful to investors that are considering the sector.
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