Real Estate Investment Trusts (REITs) and Commercial Real Estate ...
I have written numerous papers on real estate investment trusts (REITs) over the years. I find them an interesting investment vehicle and alternative to holding commercial real estate or mortgage-backed securities directly.
REITs are similar to closed-end funds but with some form of real estate (commercial property, mortgage loans, MBS, etc) as the underlying asset. The performance of publicly-traded equity REITs (backed by commercial real estate) has been stellar in 2012. As an example, the Dow Jones Equity REIT Total Return Index has risen 10.48% so far this year (annualized to 48.50%). That sounds much better than the price declines in the housing market.

And if we compare the performance of equity REITs to the Moody?s REAL Commercial Property Price Index, we see that the DJ Equity REIT index has shot up while the Moody?s REAL property index is lying flat.

That is an apples to oranges comparison because the DJ Equity REIT index contains dividends to investors which the Moody?s REAL index is only the price index. To keep a more reasonable asset class comparison, here is the DJ Equity REIT Index versus the NCREIF Property Return Index.

That is a better fit. But note that the indices are on a different scale. That is, DJ Equity REIT Returns are higher than NCREIF Property Returns, although they share a common pattern. There are several reasons for this divergence. First, DJ Equity REIT Returns are leveraged (the REITs borrow money to leverage up their returns) while the NCREIF Property Return Index is unleveraged. Second, Equity REITs are often actively traded while the NCREIF property index is not. There are other issues as well that prompted Moody?s to develop their REAL Commercial Property Price Index.
And if we look at DJ Equity REITs versus NCREIF Total Return Index over a longer period, the same patterns hold.

Dow Jones Equity REITs versus S&P 500 Index
If we compare the DJ Equity REIT Index to the S&P 500 Index, you can see of the top chart that the two indices are highly correlated.

Here is the correlation between the two indices. DJ Equity REIT Returns are highly correlated with the S&P500 Return Index, with a few notable exceptions (2008, 2010 and 2011).

The beta for equity REITs relative to the S&P 500 index is around 0.45 indicating that Equity REITs are about half as risk as the S&P 500 Index in terms of systematic risk. In other words, Equity REITs are a defensive investment (they don?t rise as much as the S&P500 when it rises, and doesn?t fall as much when the S&P500 falls, on average).

So, equity REITs are an investment vehicle which is 1) low beta, 2) highly correlated with the S&P 500 index, and 3) detached from the Moody?s REAL Index.
Bear in mind that REITs often have fairly high dividend yields making them more like bond funds with an equity kicker.

European REITs?
We are aware of the Eurozone?s financial problems. But has it drifted into their REITs as well? Yes, European REIT returns are stagnant since mid 2009.

And the spread between DJ Equity REIT returns and the European REIT returns is widening:

Summary
We have Equity REITs rebounding while their core investmens are ? stagnant.
I wonder how of this is driven by The Fed?s Zero Interest Rate policies? That is, is there a bubble in REIT prices?
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