REITs have historically exhibited a fairly high correlation to equities and a modest correlation to bonds.2 Because of this, Altegris believes that real estate fits into an investor’s portfolio as an alternative equity exposure. REITs, in particular, may provide:
Diversification Value: Adding real estate to a portfolio could potentially reduce the volatility of returns and may enhance overall performance.
Inflation Protection: Real estate returns are directly linked to the rents received from tenants. Real estate income may increase faster in inflationary environments, which would allow investors to maintain real returns. As real estate securities are backed by physical assets, they’ve historically served as inflation hedges and may provide increasing value over time.
Yield Enhancement: As of December 31, 2016, REITs, proxied by the FTSE NAREIT All REITs Index, produced a current yield of 4.34%. Compared to the 2.10% yield of the S&P 500 TR Index and the 2.44% yield for the 10-year Treasury note on the same date, real estate offers relatively attractive current income potential. This income is an important component of total return in REITs.
Liquidity: Unlike buying and selling traditional real estate, publicly-registered real estate securities are highly liquid and easily traded, with comparatively low transaction cost.
AS OF DECEMBER 31, 2016
Source: Altegris, AACA
2 For the 10-year period ending 12/31/16, REITs’ correlation to stocks is 0.76 and 0.27 to bonds. Source: Bloomberg.
Past performance is not indicative of future results. There is no guarantee that any investment will achieve its objectives, generate profits or avoid losses. Current yields are for general market comparisons and are not meant to represent any particular investment.
Indices: REITs: FTSE NAREIT All REITs Index; Stocks: S&P 500 Total Return Index; Bonds: Barclays US Aggregate Index.
In sum, an exposure to real estate, especially one that strives to opportunistically capitalize on the strength and weaknesses of diverse market segments, may offer investors the potential to capture commercial real estate’s ups and downs as a part of a
well-balanced, risk-diversified portfolio.