REIT it's own asset class?

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Drew31
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REIT it's own asset class?

Post by Drew31 »

Working on my IPS and AA and confused whether to include REIT within my equity portion or split it out by itself? I've read old forum posts, the wiki, and several books and have seen in mentioned both ways. Is it just a personal preference thing with no clear cut answer?
Tex
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Re: REIT it's own asset class?

Post by Tex »

Personal preference with no clear cut answer.
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Clearly_Irrational
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Re: REIT it's own asset class?

Post by Clearly_Irrational »

You'll need to come up with a definition for yourself as to what an asset class actually is. For me it's something like this:

1) Fundamentally different than equities and debt
2) Long term correlation of less than 0.5 to both total stock market and total bond market

So REITs are kind of like most stocks since you're buying shares of a company that does stuff to generate earnings which they pass back to you. However, they're not fully like equities since they basically just own income producing assets and they have different regulatory rules about income passthrough and such. Overall rule number one is probably a maybe.

For rule number two using Simba data we're looking at the following correlations:

REIT to TSM: 0.62
REIT to ITB: 0.21

So it's kind of on the edge, but it's stock-like enough that I'd include it as part of my equity allocation rather than as a separate asset class. I think you can make a strong case that they're a separate sub-class of equities so you should certainly consider them when divvying up your equity allocation.
scone
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Re: REIT it's own asset class?

Post by scone »

Now I'm confused. I thought REITs were a separate asset class, namely real estate, that you included with your total net worth, along with your house and any other real property. Is that wrong? :confused
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Clearly_Irrational
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Re: REIT it's own asset class?

Post by Clearly_Irrational »

scone wrote:Now I'm confused. I thought REITs were a separate asset class, namely real estate, that you included with your total net worth, along with your house and any other real property. Is that wrong? :confused
REITs are a financial instrument, so I definitely wouldn't put them in the same category as real property. All you own is a piece of paper.
Tex
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Re: REIT it's own asset class?

Post by Tex »

scone wrote:Now I'm confused. I thought REITs were a separate asset class, namely real estate, that you included with your total net worth, along with your house and any other real property. Is that wrong? :confused
That's isn't wrong if that's what you've chosen to do. Some people believe REITs are not an appropriate proxy for real estate and have characteristics that are too similar to equity. Some people believe REITS are an appropriate proxy and disimilar enough from equity to treat as real estate. Stay the course with your chosen asset allocation and avoid the noise.

However, I would note that I never include my house in my asset allocation as it's not income generating property.
staythecourse
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Re: REIT it's own asset class?

Post by staythecourse »

Depending on how you view it I think it would be under equities as they are just stocks. Now that does not mean they don't deserve special attention in a diversified portfolio due to their special tax considerations.

It is their taxations as companies under REIT designation that makes them different.

Good luck.
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Phineas J. Whoopee
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Re: REIT it's own asset class?

Post by Phineas J. Whoopee »

Clearly_Irrational wrote:
scone wrote:Now I'm confused. I thought REITs were a separate asset class, namely real estate, that you included with your total net worth, along with your house and any other real property. Is that wrong? :confused
REITs are a financial instrument, so I definitely wouldn't put them in the same category as real property. All you own is a piece of paper.
Clearly_Irrational, as s/he so often does, is posting in a manner which bears no correlation to screen name.

Directly owning real estate on which one collects rent is probably best seen as its own asset class, separate from fixed income and equity (although with equity-like potential volatility). Nonetheless, in our society real estate ownership depends entirely upon pieces of paper, which may or may not be honored in the future, and which confer both benefits and liabilities upon the owner.

Owning stock in businesses whose trade is owning real estate on which they collect rent is far less clearly different (although with equity-like potential volatility - which is completely understandable when one takes into account that they are in fact equities).

Whether REITs are enough different from other equities to qualify as a separate asset class is a topic which does not have a clear resolution.

Or, to put it another way, you pays your money and you takes your choice.

PJW
Rodc
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Re: REIT it's own asset class?

Post by Rodc »

Clearly_Irrational wrote:
scone wrote:Now I'm confused. I thought REITs were a separate asset class, namely real estate, that you included with your total net worth, along with your house and any other real property. Is that wrong? :confused
REITs are a financial instrument, so I definitely wouldn't put them in the same category as real property. All you own is a piece of paper.
You own more than a piece of paper. REITS payout, by law, something like 80% of profits. Someone more knowledgeable or with more time to Google can fact check that at to the precise percentage. REITS do own real property. So you have ownership rights to a large fraction of the income stream, and any profits they make from selling property. This is a little different from most stocks where a company can pay out profits or can keep them in house, hopefully to grow the business and increase stock price.

That said, owning the right to a large fraction of the income stream is not the same as owning the property outright. REITS are somewhere between owning property and simply owning stock in a company in the real estate business (if the payout law did not exist). REITs are a proxy for real estate. I think it is pretty clear real estate is a distinct asset class. It then comes down to: Are REITs a good enough proxy. The answer to that question is not clear.

Much property is leveraged (mortgage) and as we saw in the great melt down a few years ago, this can cause a great deal of volatility in REIT values, which you should consider as well.

Personally I own a slice of a REIT index fund. I am agnostic as to whether this is really a separate asset class, or if it should be expected to be helpful, but I don't have a good reason to alter my plans to own it.

In the broad asset allocation game, I allocate first to stocks/bonds/cash (60/30/10), and then within those broad classes. Because REITS are stocks (if possibly of a special sort), and have stock like volatility, I count them in the 60%.

Nothing really special about this choice, could just as easily target 50/30/10/10 say.
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G-Money
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Re: REIT it's own asset class?

Post by G-Money »

Rodc wrote:You own more than a piece of paper. REITS payout, by law, something like 80% of profits. Someone more knowledgeable or with more time to Google can fact check that at to the precise percentage.
It's 90%. http://en.wikipedia.org/wiki/Real_estat ... ment_trust
Don't assume I know what I'm talking about.
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Clearly_Irrational
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Re: REIT it's own asset class?

Post by Clearly_Irrational »

Rodc wrote:You own more than a piece of paper. REITS payout, by law, something like 80% of profits.
Which makes them essentially equivalent to Preferred Shares. That's still not real property like say a boat for example.
Rodc wrote:REITS do own real property.
So does Apple, but that doesn't mean I count it the same as my truck or furniture.
Rodc wrote:That said, owning the right to a large fraction of the income stream is not the same as owning the property outright.
Agreed.
Rodc wrote:REITS are somewhere between owning property and simply owning stock in a company in the real estate business (if the payout law did not exist). REITs are a proxy for real estate.
I suppose it all depends on your definition of proxy. I certainly wouldn't count them as being as good a proxy as say commodities futures for example.
Rodc wrote:I think it is pretty clear real estate is a distinct asset class.
Agreed.
Rodc wrote:It then comes down to: Are REITs a good enough proxy. The answer to that question is not clear.
I would say no, but I agree it's a bit murky.
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G-Money
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Re: REIT it's own asset class?

Post by G-Money »

Here's a Vanguard white paper about whether REITs are an adequate proxy for commercial real estate: https://advisors.vanguard.com/iwe/pdf/I ... omain=true

Vanguard's conclusion:
Commercial real estate is a unique and significant asset class. Because of this, an argument can be made for its inclusion in a diversified portfolio. The challenge investors face, however, is that unlike equities, fixed income, or commodities, the available vehicles do not offer pure exposure to the asset class. Whether utilizing REITs, a collective trust, a separate account, or direct property ownership, investors are only exposed to a small slice of the broad commercial real estate market. As a result, real estate investors must be comfortable with the potential for their investment to deviate significantly from the performance of that broad market.

For those investors who desire exposure to commercial real estate and are indeed comfortable with the potential short-term risks, we have shown that a broad REIT index can serve as an effective proxy for the real estate market. In other words, we believe it is unnecessary for investors to incur the illiquidity, high costs, and manager risk of a relatively concentrated privately managed portfolio of commercial properties.

Finally, while we have shown that REITs offer liquid, diversified, transparent, and low-cost exposure to commercial real estate, investors must be comfortable with one last risk—the risk of a sector overweight. At the end of the day, REITs are equities, and as such are represented in most broadly diversified equity funds. For example, as of December 2010, REITs accounted for just over 1% of the broad U.S. stock market. The reality is that any additional allocation to REITs can represent a significant overweighting of a potentially volatile and concentrated sector.
My take on Vanguard's conclusion: Commercial real estate is an asset class separate and distinct from equities/fixed income. REITs are equities, but they serve as a reasonably good proxy for commercial real estate. Since REITS are equities, don't go nuts in overweighting them.
Don't assume I know what I'm talking about.
Booper
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Re: REIT it's own asset class?

Post by Booper »

Drew31 wrote:Working on my IPS and AA and confused whether to include REIT within my equity portion or split it out by itself? I've read old forum posts, the wiki, and several books and have seen in mentioned both ways. Is it just a personal preference thing with no clear cut answer?
I like Mike Piper's answer to this question on his blog, ObliviousInvestor.com: http://www.obliviousinvestor.com/reits-are-stocks/

A key point is that if you own index funds, you probably already own reits. So if you say "I want to have 10% of my assets allocated to REITs", and then you put 10% of your assets into a REIT fund, and say 50% of your assets into an S&P 500 fund, then more than 10% of your assets are in REITs.
scone
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Re: REIT it's own asset class?

Post by scone »

Tex wrote:However, I would note that I never include my house in my asset allocation as it's not income generating property.
I don't include it in my asset allocation; I do include it in my total net worth, as I stated.
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Re: REIT it's own asset class?

Post by Rodc »

Booper wrote:
Drew31 wrote:Working on my IPS and AA and confused whether to include REIT within my equity portion or split it out by itself? I've read old forum posts, the wiki, and several books and have seen in mentioned both ways. Is it just a personal preference thing with no clear cut answer?
I like Mike Piper's answer to this question on his blog, ObliviousInvestor.com: http://www.obliviousinvestor.com/reits-are-stocks/

A key point is that if you own index funds, you probably already own reits. So if you say "I want to have 10% of my assets allocated to REITs", and then you put 10% of your assets into a REIT fund, and say 50% of your assets into an S&P 500 fund, then more than 10% of your assets are in REITs.
So make it 9%.

This is fiddling with things below the noise in week to week variability and far below what would cause most people to rebalance.

I suggest this is neither here nor there in the considerations one should go through in deciding to add or not add REITs.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Drew31
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Re: REIT it's own asset class?

Post by Drew31 »

Clearly_Irrational wrote: ...

2) Long term correlation of less than 0.5 to both total stock market and total bond market

...

For rule number two using Simba data we're looking at the following correlations:

REIT to TSM: 0.62
REIT to ITB: 0.21
Where is the best data source to find the long term correlations or rolling correlations between asset classes?

Discussion I'm seeing is kind of what I expected. Divergent views on whether they are needed in the first place and how to split them within the AA.
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Clearly_Irrational
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Re: REIT it's own asset class?

Post by Clearly_Irrational »

Drew31 wrote:Where is the best data source to find the long term correlations or rolling correlations between asset classes?
Good question. I'm not sure about the "best" data source, you'd probably have to ask an academic about that. For easy, practical purposes I find Simba's backtest spreadsheet to be "good enough" for most applications. (not all, it does depend on what you're studying)

For REITs he used:

Nat. Assn. of Real Estate Inv Trusts 1972-1996
Vanguards REIT Index Fund - 1997-2011
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Re: REIT it's own asset class?

Post by abuss368 »

We allocate 20% of equity to REITs and plan to stay the course.
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Re: REIT it's own asset class?

Post by Easy Rhino »

I treat REIT's as something in my portfolio that I can rebalance against EITHER stocks or bonds. So fairly separate.
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Drew31
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Re: REIT it's own asset class?

Post by Drew31 »

Clearly_Irrational wrote: ...For easy, practical purposes I find Simba's backtest spreadsheet to be "good enough" for most applications....
So it took me a bit to figure out "Simba" was an actual boglehead and not a corporation or website. Eventually found the link, and yes, I think this spreadsheet should give all the information needed for practial purposes.
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Re: REIT it's own asset class?

Post by willimusk »

FWIW, Morningstar treats REITs as equities in its X-ray tool. Personally, because of their equities-like volatility, I treat them as not-bonds, meaning I set my bond allocation without considering REITs. By default, that shifts them toward my equities allocation, although I consider them a separate instrument within that allocation.
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Re: REIT it's own asset class?

Post by Aptenodytes »

There's no difference between your alternatives. Either way you are setting a target for REITs. The question to ask is whether to target REITs or not. If you answer "yes" it doesn't matter what you label it. E.g. 30% stocks plus 10% REITs equals 40% (stocks plus REITs).
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Re: REIT it's own asset class?

Post by retiredjg »

Drew31 wrote:Working on my IPS and AA and confused whether to include REIT within my equity portion or split it out by itself? I've read old forum posts, the wiki, and several books and have seen in mentioned both ways. Is it just a personal preference thing with no clear cut answer?
Opinions vary.

Go to the Wiki and search for Ferri Core Four (lazy portfolio) for a wiki page and a link to a long discussion on this issue.
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Re: REIT it's own asset class?

Post by YDNAL »

Drew31 wrote:Working on my IPS and AA and confused whether to include REIT within my equity portion or split it out by itself? I've read old forum posts, the wiki, and several books and have seen in mentioned both ways. Is it just a personal preference thing with no clear cut answer?
Determine for yourself what is a REIT?
http://www.reit.com/IndividualInvestors ... aREIT.aspx
Hint: a company that owns, and in most cases, operates income-producing real estate. Some REITs also engage in financing real estate. The shares of many REITs are traded on major stock exchanges.
Whether your IPS for Equities says something like: 50% Total US Stock, 40% Total International, 10% _____ (overweight above total markets), or it says something else, should be inconsequential. Whatever that 10% represents, in the illustration above, it represents an overweight over/above total markets.
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