Research Update - Real Estate Investment Trusts (REITs)
A Truly Global Asset Class

Equity REITs are companies that own and often manage income-producing real estate properties, such as hotels, office buildings, apartments and shopping centers. To qualify as a REIT, a company must meet, among others, the following two requirements. First, it must invest at least 75% of its assets in real estate. In addition, it must derive at least 75% of its income from real estate property or interest on real estate financing. All of Oakwood’s Global Equity Strategies have an allocation to REITs: The Conservative Global Equity Strategy invests in US REITs, and the Moderate and Aggressive Global Equity Strategies have an allocation to both the US and International REIT markets.

REITs have independent risk and return characteristics that make them a separate asset class, one that is characterized by low sensitivity to market movements and significant exposure to size and value risk factors. An advantage of REITs, when compared to direct investments in real estate, is that they make it easier for investors to have a well-diversified allocation to the real estate asset class, both in terms of the types of properties and the locations of those properties, because they are cheaper to buy and sell than real estate, and do not have the same liquidity constraints as a direct investment in real estate.

The table below displays the return and standard deviation (a statistic describing volatility, the higher the percentage, the higher the volatility) for US REITs, the S&P 500 Index, the large cap Russell 1000 Value Index, and the Russell 2000 Index, which is an index that tracks the small cap universe. As you can see, REITs have displayed superior returns over the other indices, with lower volatility, except for the volatility of the Russell 1000 Value Index.

The global market for publicly traded real estate securities has grown substantially in recent years. For decades, publicly traded REITs or REIT-like structures were mainly available in the United States and Australia. But, as more developed countries and even some developing countries have adopted REITs or REIT-like structures to encourage investment in commercial real estate, and as investors have continued to appreciate the benefits of investing in publicly traded real estate equities, we have seen, in this decade, the emergence of a truly global real estate asset class.