REIT Blues

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REIT Blues

Postby IlliniDave » Tue Jul 16, 2013 8:03 am

My master plan says it is soon time to take my initial stake in REITs (moving from ~0% up to ~5% of equity portfolio over a couple years, then gradually building to 10% over a longer time).

Call me a market timer maybe, but I'm having a hard time motivating myself to buy a stock class with a P/E over 62. I know REITs are a bit unique in the world of US stocks, and with earnings growth of 3.5% and yields around the same (looking at VGSIX) it seems like in the long haul one might expect around 4% real +/- whatever happens to that P/E multiple (it seems high so in time I'd guess it would be more likely to go down than up, and erode that 4%). wbern had a post on the topic not long ago.

Looking at Vanguard's global REIT VGXRX the P/E is under 13, earnings growth over 10%, yields around 3% and has half the P/Bk of VGSIX.

Based on that I have to think international REITs are fundamentally different businesses than US REITs? Or, is the ex-US REIT class just a potential good buy right now (if one has ability to shoulder the risk)?

Maybe real estate is a non-essential tilt? (already have some cap weight exposure in my total market funds presumably)
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Re: REIT Blues

Postby Call_Me_Op » Tue Jul 16, 2013 8:06 am

I don't tilt to REITs because back-testing fails to show a significant benefit.
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Re: REIT Blues

Postby G-Money » Tue Jul 16, 2013 9:06 am

I don't think there is such a thing as a "essential tilt." That said, I think small and value tilts are potentially more useful then a REIT tilt. I tilt my portfolio to small and value and REIT, but my REIT tilt is very small (less than 7% of equities and just 5% of my portfolio). All of my REIT exposure is in domestic, but that's because the slice is already so small that it doesn't make sense for me to further divide it between US and ex-US.

I'm not sure how useful traditional valuation measures are for evaluating REITs. I abandoned all efforts to time the market anyway, so it doesn't matter much to me.
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Re: REIT Blues

Postby Chris M » Tue Jul 16, 2013 10:35 am

I'm not clear on what function you are looking to REITs to perform in your portfolio? A lot of people hold REITs as a diversifier, and it is true that they did well during the 2000-02 bear market. But since then U.S. REIT correlations with the overall market have increased substantially. The correlations between US and international REITs have also gone way up; William Bernstein has a graph in Skating Where the Puck Was that shows a pretty steady rise from zero in the early nineties to about 0.8 today for the three-year rolling correlation. Correlation aside, the high leverage used by REITs makes them vulnerable to financial crises--hence they did significantly worse than the S&P 500 during the 2007-09 bear market. I don't like the idea of holding a diversifier that may (?) help you in a run-of-the-mill downturn, but that may only make things worse in the really nasty situation of a credit crunch.

Some people hold REITs as an inflation hedge, but I think you can get the same inflation hedging power, plus a better diversification benefit, using precious metals equities.

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