The REIT call: The case for REITs in real estate allocations
Real estate is an important building block for constructing multi-asset portfolios, offering investors meaningful long-term return potential, inflation protection and diversification benefits. REITs, however, are often overlooked by institutional investors. While REITs experience listed equity–like volatility in the short term, driven by public-market discount-rate fluctuations, valuation multiples and other macro factors, over the long term, the cash flows from their underlying real estate assets should drive returns, resulting in a convergence with direct real estate valuations. In addition, by combining REITs with direct real estate holdings or private real estate funds, it may be possible to improve the overall risk-adjusted return profile of a multi-asset portfolio. Given this, REITs merit a place in an investor’s allocation to real estate, providing important levers to create complete and efficient real estate allocations in institutional portfolios.