Real Estate Investment Trusts (REITs) offer the average investor an opportunity to participate in the broad commercial real-estate market. They are publicly traded on major stock exchanges, providing ready liquidity and performance that can be measured against globally recognized benchmarks. We recommend REIT exposure in most diversified portfolios because REITs tend to have low correlation with the overall stock and bond markets, offering the potential to improve a portfolio’s overall risk/reward profile.
Further, diversification is only part of the case for owning REITs. The “hybrid” nature of their returns—the income generation typically associated with bonds combined with the appreciation potential of stocks—is appealing to many investors. Over a long time period, global REITs have provided a roughly one-third to two-thirds ratio of income to appreciation. Bernstein invests in REITS around the world to seek the best opportunities wherever they may be. As with all of our investment strategies, our REIT investment process is based on our rigorous fundamental and quantitative research.
As with all our investment strategies, we apply rigorous fundamental and quantitative research to identify opportunities and seek to manage the risks of REIT investing. REITs have characteristics of both stocks and bonds, so we analyze them from both perspectives. We look at the skill of their management teams and their internal diversification, because these factors can affect REITs’ value, especially in times of market stress. We also monitor tax laws and other regulatory issues that could have an impact on the value of real estate.