Reit Classification

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cliff
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Reit Classification

Post by cliff » Mon Jul 09, 2012 6:21 pm

Wondering how folks classify REIT's'? Do you uses the typical large/medium/small breakdown or use a separate category or something else?

livesoft
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Re: Reit Classification

Post by livesoft » Mon Jul 09, 2012 6:23 pm

Check out a Morningstar Instant X-ray of your favorite REIT funds. Help us out and post the results in this thread. Are you surprised?
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cliff
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Re: Reit Classification

Post by cliff » Mon Jul 09, 2012 6:46 pm

I'm not sure of your point. It's 45/38/17 or so. My point and question is does it make sense to break down by market cap or classify it differently?

staythecourse
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Re: Reit Classification

Post by staythecourse » Mon Jul 09, 2012 7:32 pm

Good question and has been discussed numerous times with no real answer (likely there is no true answer).

I think REITS are under equities as they fit under the "real estate" component under equities. My answer would be it is a sector play under equities, but does give better diversification then other sector plays as they are different in taxation then other equities.

Some would say they are under alternative investments. I think owning real estate outright and renting it would fit as an alternative, but not the liquid REIT market. It has been shown owning real estate protects against inflation (what most alternative investments do like gold, commodities, farmland, etc..). REITS has not protected against inflation.

BTW, the "real estate" section in the morningstar xray tool is NOT all REITS. Mortgage companies, property managment, etc... also are under that classification. So don't make the same mistake most do and assume the real estate component with the Xray tool is all REITS, for example the x% of real estate for SCV is NOT all REITS.

Good luck.
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pkcrafter
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Re: Reit Classification

Post by pkcrafter » Mon Jul 09, 2012 7:36 pm

Cliff, it is debated on the forum whether an investor should hold REITS as an individual fund or just accept what's in small or even TSM. REIT returns cannot be explained by the Fama/French 3 factor model, so they are considered a separate equity asset class. They are included in Rick Ferri's Core Four, and I think they can be a worthwhile diversifier. David Swensen recommends 15% of total equity in REITs.

Paul
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livesoft
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Re: Reit Classification

Post by livesoft » Mon Jul 09, 2012 8:55 pm

cliff wrote:I'm not sure of your point. It's 45/38/17 or so. My point and question is does it make sense to break down by market cap or classify it differently?

So if the fund you looked at is 45/38/17, then how can you call it large-cap? Or mid-cap? Or small-cap? It is clearly a mix of market caps, is it not? So if you want to break it down by market cap, ....
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Watty
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Re: Reit Classification

Post by Watty » Mon Jul 09, 2012 9:24 pm

Some of the portfolios here consider them as a separate asset class;

http://www.bogleheads.org/wiki/Lazy_Portfolios

You might also want to calculate your asset allocation two separate ways; as percentages of your investments, and as percentages of your net worth. For many people the big difference will be in the home equity of the house they live in. When a large percentage of your net worth is in home equity you might be cautious about adding a lot of REIT investments since that could leave you too concentrated in real estate.

jccasey
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Re: Reit Classification

Post by jccasey » Mon Jul 09, 2012 10:25 pm

One of the issues with publicly traded REITs is that they are much more highly correlated with the public markets than private real estate. The University of Chicago Booth School of Business put out a good report a while back that showed the public REIT index (NAREIT) and private real estate property index (NCREIF) to only have a correlation of 0.25. Also, Citigroup's REIT research team puts out a daily report on REIT stocks that shows the entire sector to be significantly overvalued in terms of the premium that the stocks trade at versus the underlying net asset value of the real estate. Personally, I suspect that the overvaluation of REIT stocks is driven, in part, by the LBO privatizations of numerous REITs pre-crash (which reduced supply of REIT shares) coupled with the increase in demand for REIT shares as index funds/ETFs become more popular with people seeking real estate exposure. Classic case of limited supply + strong demand = higher prices. The answer seems to be private real estate, but the private REITs like Wells REIT and CNL have better odds for the house than the owner of a roulette table.

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