Most defined contribution investors are overlooking real estate, and missing out on its powerful portfolio benefits. Historical data shows that adding a permanent real estate investment trust (REIT) allocation can benefit investors in meaningful ways.
KEY TAKEAWAYS
- REITs offer competitive, differentiated return potential and low correlations to other assets, which can provide portfolio diversification benefits and help to improve risk-adjusted portfolio returns.
- Adding a dedicated 10% real estate weighting to an illustrative 60/40 stock and bond portfolio has historically resulted in higher total returns, without meaningfully increasing volatility.
- As an investment in hard assets, real estate has inherent inflation-hedging qualities that help defend against rising living costs, yet many investors are under-allocated to the asset class.
Adding a dedicated 10% allocation to REITs may significantly boost funds available in retirement.
Competitive, differentiated return potential. REITs offer liquid access to income-generating real estate across property types and regions. They offer the potential for equity-like, long-term returns through high and growing income from rents, plus capital appreciation over time. Real estate cycles are influenced by supply and demand dynamics and typically differ meaningfully from equity market cycles.
Low correlations to other assets. REITs tend to have low correlations to the broader equity and fixed income markets, which can provide portfolio diversification benefits and help to improve risk-adjusted portfolio returns.
A good fit for retirement plans. Adding a dedicated 10% real estate weighting to an illustrative 60/40 stock and bond portfolio (i.e., a 50% stock/40% bond/10% REIT allocation) has historically resulted in higher total returns, without meaningfully increasing volatility.
REITs can have a meaningful impact on portfolio returns over the long term
Effects of adding a dedicated 10% REIT allocation to a hypothetical retirement account
At April 30, 2025. Source: Bloomberg, Cohen & Steers.
Past performance is no guarantee of future results. The information is for illustrative purposes only and does not reflect the performance of any fund or account managed by Cohen & Steers. There is no guarantee that any historical trend illustrated above will be repeated in the future or any way to know in advance when such a trend might begin. See endnotes for methodology and additional disclosures.
A dedicated REIT allocation can help retirees and pre-retirees build a resilient, income-generating portfolio capable of supporting their financial needs throughout retirement.
Why dividends matter. Dividends are a key reason for REITs’ long-term outperformance. REITs are exempt from corporate taxes and must distribute at least 90% of their annual taxable net income. This leads to higher dividend yields than similar stocks. As cash flows grow, REITs typically raise dividends. Although dividend income is less relevant to plan participants in the accumulation phase, it can meaningfully boost total returns. Dividends offer a more stable source of returns than price gains, and reinvested dividends serve as a form of dollar-cost averaging—buying more shares when prices are low and fewer when prices are high.
Important inflation defense. As an investment in hard assets, real estate has inherent inflation-hedging qualities that help defend against rising living costs. Inflation can drive up the cost of land, materials and labor, raising the bar for new construction (limiting supply) and enabling landlords to increase rents. Many commercial leases even include rent escalators tied to a published inflation rate.
Most target date funds miss the mark. Despite REITs’ many benefits, target date funds (TDFs), a popular defined contribution plan option, are typically under- allocated to real estate. Therefore, most defined contribution plan participants may be under-allocated. An examination of the 20 largest TDFs, for instance, reveals an average dedicated REIT allocation of just 3%. This is in contrast to defined benefit plans, endowments and foundations, which have long recognized the benefits of real estate investments and typically have target allocations of more than 10%, according to Hodes Weill, a leading global capital advisory firm.
Outside of TDFs, defined contribution plans’ dedicated allocations to real estate represent less than 1% of assets on average (according to Morningstar data). This further underscores investors’ need to rethink their retirement funding strategy.
Should you consider your home a real estate investment? Homeownership is appealing and can build value, but a home is typically a consumption item, not an investment. A primary residence costs money, including mortgage interest, taxes, insurance, utilities and maintenance. A personal home consumes income and may not be easily sold in retirement to produce gains or income. In contrast, REITs generate rental income, paying shareholders tax-advantaged dividends while also offering the potential for capital appreciation.
FURTHER READING
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How tariff pressures could affect U.S. listed real estate, which real estate sectors face the most headwinds, and why strong fundamentals put REITs on relatively solid ground amid volatility.
The strong performance of towers and the unique drivers of their resilience
The top-performing U.S. REIT sector this year even in the wake of recent market volatility. Favorable supply and demand dynamics. And historically low valuations.
3 Reasons to own Listed REITs today
We see compelling evidence to own listed real estate in the current environment
Index definitions and important disclosures
An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations, as volatility and other characteristics may differ from a particular investment.
Methodology. Accumulation phase: Initial allocations without real estate: 35% U.S. equities, 25% international equities, 25% U.S. bonds, 15% international bonds. Initial allocations with real estate: 10% REITs, 29% U.S. equities, 21% international equities, 25% U.S. bonds, 15% international bonds. Withdrawal phase: Initial allocations without real estate: 20% U.S. equities, 15% international equities, 35% U.S. bonds, 15% international bonds, 15% Treasury inflation- protected securities (TIPS). Initial allocations with real estate: 10% REITs, 14% U.S. equities, 11% international equities, 35% U.S. bonds, 15% international bonds, 15% Treasury inflation-protected securities (TIPS). Annual withdrawals represents 50% of ending salary.
U.S. REITs: FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization–weighted index of all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property. U.S. stocks: The Russell 3000 Index measures the performance of the largest 3000 U.S. companies, representing approximately 98% of the investable U.S. equity market. Global stocks: The MSCI All Country World Index ex-USA Index captures large- and mid-cap representation across 22 of 23 developed markets (DM) countries (excluding the U.S.) and 24 emerging markets (EM) countries. U.S. bonds: Bloomberg U.S. Aggregate Bond Index is a broad-market measure of the U.S. dollar–denominated investment-grade fixed-rate taxable bond market, and includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and commercial mortgage-backed securities. Global bonds: Bloomberg Global Aggregate Bond Ex-U.S. Index provides a broad-based measure of the international investment-grade fixed-rate debt markets.
Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any market forecast made in this document will be realized. The views and opinions presented in this document are as of the date of publication and are subject to change without notice. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment, and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or to account for the specific objectives or circumstances of any investor. We consider the information to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Cohen & Steers does not provide investment, tax or legal advice. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing.
Risks of investing in real estate securities. The risks of investing in real estate securities are similar to those associated with direct investments in real estate, including falling property values due to increasing vacancies or declining rents resulting from economic, legal, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors such as interest rate changes and market recessions. Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties, and differences in accounting standards. Some international securities may represent small- and medium-sized companies, which may be more susceptible to price volatility and be less liquid than larger companies.
Cohen & Steers Capital Management, Inc., (Cohen & Steers) is a registered investment advisory firm that provides investment management services to corporate retirement, public and union retirement plans, endowments, foundations and mutual funds.