For centuries, wealth creation has been achieved through the ownership of land and, more recently, commercial buildings — a physical ownership of the real estate, if you will. Today, investors don't have to own the deed — to pour money directly into land or buildings — to create wealth; instead, they can invest in real estate in a more abstract fashion. That is to say, obviously, via real estate investment trusts (REITs) and mutual funds that invest in both domestic and international REITs and listed property companies. By now, financial advisors are well versed in the “new” asset class.
Real estate, though a significant portion of the world's economy, still is considered an alternative investment. Yet smart and savvy investors, whether they're institutional or individual, are increasingly interested in allocating a portion of their portfolios to real estate, and REITs in particular.
REITs provide investors with access to real estate assets and markets that otherwise would be unavailable, according to Stephen Todd Walker, author of, Wave Theory for Alternative Investments. Most people, for example, don't have the funds to buy a 50-story office tower in Manhattan, yet investing in a REIT makes it possible for John and Jane Doe to partake in the returns generated by such quality property. Likewise, it usually is impossible for individuals to acquire properties in foreign markets such as China and Brazil. Global real estate funds, however, offer exposure to growth-oriented markets.
REITs are well-liked for their ability to provide diversification to investment portfolios. And, as more REITs are established, often in niche sectors such as student housing and data centers, that diversification is multiplied.
Moreover, REITs continue to serve as a hedge against inflation. Despite the fact that inflation has not been a concern for several years, financial experts warn that an inflationary environment is sure to occur in the near future. Although REITs have recently been tied to the movement of the overall market and broader economy — and therefore subject to much of the same volatility — they still maintain a low correlation with the broader equity markets, Walker points out.
While REITs have enjoyed periods of significant investor interest over the past two decades, the current global economy has cast a pall over the entire sector. Investors perceive REITs to be on the higher end of the risk-reward continuum, and as they seek a safe haven for their money, REITs have become less attractive.
Walker cautions investors to avoid overreacting to current market conditions. “A lot of investors have done very, very well by investing in REITs, and if you aren't examining REITs as an important part of your clients' portfolio, you are not helping them,” he asserts. “The best time to go surfing is not when it's sunny and the waves are flat. The best time to surf is during a storm.”