Property & Infrastructure Funds Real Estate Investment Trusts (REITs)

Surprisingly no dedicated thread exists on this topic. Given that a couple of our brightest investors here (@dunno and @The Falcon) have chosen to invest in an International REIT Index ETF (DJRE) I thought this would make for an interesting discussion?

To start with the lower correlation of REITs vs other Asset classes is often quoted as a good reason for investing in REITs to help smooth capital volatility. However I’ve also seen it written many times generally in international literature that there’s a close correlation between REITs and Small Cap stocks. @dunno are you able to crunch your data to substantiate whether this is true or not please for International REITs vs Int Small Caps?

Therefore I was wondering if International REITs not only provide correlation benefits and a high yield income stream but also substitute somehat for small cap exposure? In which case adding the likes of DJRE to the portfolio might further compliment VGS which is International large / mid cap only? Note also that ASX Index ETFs where Areits make up over 8% of the Index, REITs are only around 3% of International developed indices.

 

Currently don't touch A-REITs because like most here am already way too overweight on Australian property (it is a property forum after all!)

I am looking to add some international property exposure to my portfolio, probably up to 10% in REITs like DJRE.

 

Correlations of G-REITs and global equities

Figure 2 shows the correlation between G-REITs and global equities spiked in 2008 with all public market assets classes correcting severely. Given the V-shaped recovery that G-REITs enjoyed, along with broader equities, the high correlation lingered around until 2012. This seemed to have affected the mindset of many real estate investors towards the listed vehicle. Since 2013, four years into the post-GFC recovery, a decoupling was observed, taking correlations back to historical norms and back to levels that have traditionally provided diversification benefits to investors.

https://nabam.nab.com.au/content/dam/nabam/pdf/presima/presima-evolution_of_g-riets_brand.pdf

 

I also wouldn’t touch AReits. Rediculously concentrated both in number and sector. Besides you get over 8% exposure by investing in a typical cap weighted ASX index fund.

International REITs are a far more attractive option for those wanting to overweight this sector.

https://www.spdrs.com.au/etf/fund/ref_doc/Factsheet_DJRE.pdf

REITs are hardly a value opportunity at the moment but they will be again at some stage.

 

Brightest? Perhaps in Dunno's case but I'm just a BS artist. Not mentioned much in the literature, but DJRE also has some EM exposure at 6%. Not sure if thats a pro or con, but I'd rather real asset exposure in EM's I think.

 

Not sure about historical correlation similarities between REIT’s and small Caps. It may be similar but as they say correlation does not imply causation. I do not consider REIT’s as a substitute for small caps.

REITS for me are about differentiating between assets with different ‘durations’. REITS are more sensitive in the ‘short term’ to interest rate changes than broad based share index. I would also consider using Infrastructure for the same purposes, either for me is a ‘long term’ substitute for bond exposure.

As an aside, I am considering decreasing my % allocation to DJRE if I include a permanent allocation to VVLU. This would be on the basis that value stocks are priced more on their current earnings potential than their ‘future growth potential’ which makes their duration act more like a REIT than the broad-based index – so I see partial substitution benefits there.

I dunno if any of the above is theoretically correct. They are simply the perceptions that drive my allocation decisions. (ie also BS)

 

Well certainly a damn side brighter than me which even then is probably an insult.

In the case of BS artist well I can confidently say I’m far superior in that department.

 

I suppose for a total return investor it’s about never knowing what will do well in a given year and hence diversification is the best defence against capital volatility:



Gee income investing is so much easier thank goodness. I’d hate to be reliant on realising capital to meet retirement expenses.

 

So the following ETF doesn’t interest you (at the right time)? US small caps only but very low fee of 0.07% and in the process of being converted to AUS domiciled:

https://www.blackrock.com/au/indivi...e-s-p-small-cap-etf-fund-fact-sheet-en-au.pdf

 

It wouldn't interest me as a substitute for a REIT fund as per your opening post.

If you want international small cap exposure it looks like a good option now they have converted domicile, but do you want international small cap exposure - remains the key question. Personally, it’s not something I’m particularly looking for now as I have large exposure to small caps through direct Australian holdings.

 

Not sure what period they measured though:

Investing beyond the backyard for better returns and greater diversification | Money Management

 

Sorry I meant in general as opposed to a substitute for REITs.

Personally as a retiree small caps don’t interest me. Given the volatility at times I’m not all that sure REITs are great for retirees either? Then again the following chart suggests that it may not be as bad as we’re often lead to believe. I’m assuming these are unhedged:

 

Investment Perspectives: Do rising bond yields hurt listed global real estate?
7 February 2018

Investment Perspectives: Do rising bond yields hurt listed global real estate? // Bennelong

 

That’s the beauty of real estate as a substitute for bonds. You get the “hold to maturity” return that is ‘not’ impacted by inflation in the ‘long run’ so gives a vastly superior real return to bonds and yet you still get the short-term fluctuations (similar to mark-to-market repricing of bonds) as rates fluctuate giving the 'potential' for non-correlated asset volatility and an improved efficient frontier style portfolio return without using a crap 'long term real return' asset class.

 

“Long term” being the key words. I think new retirees holding REITs instead of bonds during the GFC would have regretted substituting them for Bonds.

I could have some fun on Boglehead forum posting that comment. Might be as bad as when they found out St Jack was a dividend investor.

 

Where do you read they are in process of converting to AUS domiciled? On their website i couldn't find it anywhere and it still shows as US domiciled.

Cheers,
Oracle.

 

Was posted awhile back:

iShares Simplify Investing | BlackRock Australia

iShares converts internationally domiciled ETFs to Australian

 

Absolutely, "long term" is the key – I’m actively seeking short term pain for long term gain. It's not about smoothing volatility.

I think when most people consider bonds, what they really want is not differentiating correlation for rebalancing opportunities and improved real returns, but just plain vanilla risk reduction, in which case they should probably be in straight cash not bonds and defiantly not something bond like but with more volatility.

My problem with cash is that it is very risky from an investment hypothesis that defines investment as an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. I hope to never have to have a bond allocation – let a lone a cash allocation or god help me a gold allocation. REITS/Infra is as low as I will stoop.

 

Thanks that's great news!

I would certainly be looking at investing in some of the ETFs that are going to be domiciled in Australia.

Cheers,
Oracle.

 

I wouldn't be surprised if Vanguard follows by converting their US total market ETF (VTS) soon. But even if they don't the combination of iShares S&P500 + midcap + smallcap would achieve the same outcome.

Cheers,
Oracle.