Real estate securities enable investors to capitalize on the growing securitization of real estate and the historically beneficial investment characteristics of large-scale income-producing properties.
REITs and the growth of global real estate securities
Over the past two decades, the real estate securities market has seen substantial growth due in large part to the increasing global adoption of the REIT structure. REITs provide investors with an efficient way to access the benefits of real estate ownership, while also encouraging capital formation due to their unique tax advantage.
Local economic exposure
Real estate securities offer one of the most direct means of participating in local economic growth, as these companies typically derive most of their income from properties located within their home countries. Due to the inherently local nature of real estate, it is important to understand the interaction of local economic forces, such as central bank policy, financing availability, employment trends, business and consumer spending, property supply and foreign investment.
Attractive investment characteristics
Real estate securities provide ready access to the benefits of investing in large-scale, income-producing commercial properties. Combining various qualities of stocks, bonds and real estate, this asset class has demonstrated valuable investment characteristics over time.
- Dividend income. REITs are required by law to distribute a majority of their income to shareholders. As a result, they tend to have higher dividend yields than other equities with similar risk profiles. These dividends are often covered by cash flows from rents paid by tenants with long-term leases.
- Long-term growth potential. Real estate securities offer the potential for meaningful capital appreciation, benefiting from growing populations and economic activity, which can lead to increased demand for space, rising property values and higher rents.
- Portfolio diversification. Because REITs and other real estate securities are backed by real property, they have exhibited versatile return characteristics in a variety of economic conditions, monetary policy environments and inflation cycles, providing valuable diversification benefits to an investment portfolio.
- Participation in multiple property sectors and regions. A portfolio of real estate securities can provide ownership interest in thousands of properties, allowing investors to easily diversify across property types and geographic regions without committing the high levels of capital required to achieve similar diversification through direct real estate investment.
- Liquidity and daily market pricing. Public markets provide a high level of liquidity relative to the long lock-up periods and limited secondary markets for private real estate. This liquidity provides active investment managers with great flexibility to take advantage of emerging opportunities. Unlike the appraisal-based valuations for private property, which can lag by months or quarters, real estate securities offer real-time pricing.
- Transparency and corporate governance. As listed securities, real estate companies are subject to oversight by government regulatory agencies, which require strict standards of corporate governance, financial reporting and information disclosure. Real estate securities face added scrutiny due to their tax advantages and required distribution levels, providing investors with even greater transparency.
- Management teams that create value. Most listed real estate companies are run by experienced management teams that can add value beyond the underlying real estate in their portfolios through acquisitions, disposals and development activities.
- Focus on landlords. The strategy excludes developers and other companies that derive a meaningful portion of their revenue from non-rental activities. As such, it may appeal to investors who prefer to have a strict definition of real estate.
View Cohen & Steers’ real estate securities analysis.
The views and opinions are subject to change without notice and represents an assessment of the market environment at a specific point in time, should not be relied upon as legal, investment or tax advice and is not intended to predict or depict performance of any investment. 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 suitability for investment. Investors should consult their own advisors with respect to their individual circumstances.There is no guarantee that any historical trend illustrated above 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 a market forecast made in this commentary will be realized.
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Risks of Investing in Global Real Estate Securities
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 less liquidity than larger companies. No representation or warranty is made as to the efficacy of any particular strategy or fund or the actual returns that may be achieved.