Why REITs outperform equities over the long term
Real estate investment trusts (REITs) have generally outperformed equities over long-term investment horizons says Cohen & Steers, a pioneer in investing in listed and liquid real estate assets in the US. Based on Cohen & Steers’ analysis, US REITs have outperformed the S&P 500 index by more than 1.6% annually since 1991, a significant result given the US REITs market is the world’s largest.
“We believe that liquid real assets, such as REITs, can provide exposure to hard assets and alternative sources of income; it is a means to add potential diversification to a portfolio and provide alpha opportunity in inefficient markets,” says Todd Glickson, executive vice president and head of Global Marketing and Product Solutions.
TAILORED SOLUTIONS, ACTIVE MANAGEMENT
According to Glickson, active management works well in listed real estate. “Our bespoke solutions allow us to take a very focused and disciplined approach,” he says.
Returns from the company’s Global Realty Focus Composite have exceeded the FTSE EPRA/Nariet Developed Real Estate Index over one, three and five year periods. Over a five-year duration, for instance, Cohen & Steers’ Global Realty Focus Composite posted a return of 11.28% per annum as of 31 March 2019, compared with 6.42% by the FTSE EPRA/Nariet Developed Real Estate Index.
The company has $62.6 billion of assets under management (AUM), of which $26.4 billion or 42% is invested in US real estate securities. Global or non-US real estate securities make up $13 billion of assets with listed infrastructure, commodities, natural resource equities, and preferred securities accounting for the rest.
Pension funds and sovereign investors who have invested primarily in the private market are increasingly allocating to listed REITs, says Glickson.
US-CHINA TENSIONS
On the potential for the US-China trade tensions to dent performance going forward, Glickson says an all-out trade war would impact most asset classes. However, his view is that REITs will likely fare better. “When comparing US REITs versus the S&P 500, REITs have the third-lowest exposure to international markets out of all the sectors within the S&P 500,” he says.
Other factors that could contribute to potential outperformance include its low correlation with stocks and bonds, as well as its long-term cash flow structure since a US REITs must pay out at least 90% of its taxable income to shareholders.
“The listed real estate sector generally offers diversified returns vs. equities, underscoring the potential value of defensive, lease-based revenues and high dividend yields in an environment of heightened uncertainty,” says Glickson.
Looking ahead, Glickson believes the US Federal Reserve’s more dovish stance on interest rates will benefit REITs since nominal growth is still driving demand for most types of commercial real estate in most regions with consumer and business confidence remaining elevated, leading to strong capital expenditure spending and hiring.
In Asia, the company is overweight in listed real estate equities that have exposure to Hong Kong and mainland China’s retail industry. It also favours Japan and mainland China’s developers.
“The retail sector in the region will continue to benefit from robust tourism numbers,” says Anton Chan, head of institutional sales and client services in Asia. “Chinese developers are undervalued in our view,” he adds.
INCREASED FOCUS ON ASIA
Clients domiciled in Asia accounts for about 20% of Cohen & Steers’ AUM and the company already has a strong presence in Japan, where it is a key sub-advisor for a Japan Investment Advisor.
As the private wealth management sector expands in Asia, Cohen & Steers plans to increase its focus in the region.
“We are looking to increase our engagement here with family offices and the private bank sector to understand their investment needs, which are similar to the long-term investment needs of institutional investors,” says Glickson. “REITs provide real estate exposure but with more liquidity than private investments in property, and our customised solutions, have generally been able to deliver returns that beat benchmarks.”
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