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Actively managed REITs strategies – an alternative to open-ended property funds

In view of the current crisis in open-ended property funds in Germany, some institutional investors are considering what alternatives are available on the market. “Real estate investment trusts (REITs) as part of a diversified portfolio can increase risk-adjusted returns and at the same time provide more stability in this volatile economic environment.”

This is according to  Claudia Reich Floyd, portfolio manager for global real estate equities and Head of the German office of Hazelview Investments, a global alternative investment manager specialising in real estate. This applies even more to the active management within REITs strategies.

In a new research report (“REITs 101: Unlocking the value of public real estate“) , Mrs. Reich Floyd and her colleagues list a handful of reasons why actively managed REITs are attractive in the current environment.

Dividends: REITs offer dividend yields that are generally higher than those of stocks and bonds. As an example, Hazelview cites the dividend yield of US REITs over the 10-year period to August 2024. These were significantly higher than those of the benchmark S&P 500 equity index over the same period (see chart 1).

Chart 1: Dividend yields U.S. REITs vs. S&P 500: over ten years

Dividend yields U.S. REITs vs. S&P 500 over ten years (Source: Bloomberg. U.S. REITs represented by FTSE NAREIT All REITs Index Sept. 2014 to August 2024)

Source: Bloomberg. U.S. REITs represented by FTSE NAREIT All REITs Index

Capital appreciation: REITs have significant potential for capital appreciation. For example, the FTSE NAREIT All REITs Index has achieved an annualized return of 9.3% over the past 30 years through a combination of capital gains and dividends. The S&P 500 returned 10.7% over the same period.

Inflation protection: This protection arises for existing properties when the cost of building new homes rises due to inflation and makes existing property more valuable. For rented properties, prices can be adjusted regularly, either as a fixed rate increase (usually 2 to 4%) or based on changes in the Consumer Price Index.

Diversification: REITs have a lower correlation to traditional asset classes. This is illustrated by the comparison of U.S. REITs with U.S. equities and bonds over a period of 25 years (see chart 2).

Chart 2: Correlation of U.S. REITs vs. S&P 500 and 10-year U.S. bonds over 25 years

Correlation of U.S. REITs vs. S&P 500 and 10-year U.S. bonds over 25 years (source: Bloomberg, U.S. REITs represented by FTSE NAREIT All REITs Index, U.S. bonds by Bloomberg U.S. Aggregate Bond Index)

Source: Bloomberg, U.S. REITs represented by FTSE NAREIT All REITs Index, U.S. bonds by Bloomberg U.S. Aggregate Bond Index

Active management: “The REITs market is particularly heterogeneous and less efficient than other public equity markets,” says the portfolio manager. “It is fragmented and characterised by many different types of property, forms of use and geographical locations.” This complexity could prevent passive strategies, which often rely on broad indices, from capturing and accurately reflecting the unique value of each property type.

“REITs have proven their worth in the past due to their inflation protection, opportunity for capital appreciation, diversification and robust dividend yields,” summarises Mrs. Reich Floyd. “Active management in REITs has also demonstrated the potential to outperform passive strategies in such a complex and dynamic environment as the property market.”

Hazelview Investments is an active investor, owner and manager of global property assets dedicated to creating value for people and places. Hazelview employs a global investment and asset management team of more than 90 people across its offices in Toronto, New York, Hong Kong, and Hamburg and has CAD 11.7 billion (approximately EUR 8.0 billion as of 30 June 2024) of real estate assets under management. Further information can be found on the website: www.hazelview.com.

Image sources

  • Hazelview – Grafik 1_REITs 101: Hazelview Investments
  • Hazelview – Grafik 2_REITs 101: Hazelview Investments