DWS and GIC co-publish paper on the role of REITs in Real Estate Allocations

Apr 03, 2023

In Brief

REITs share characteristics of both equities and real estate
REITs provide important levers to create complete and efficient real estate allocation in institutional portfolios
REITs can play an important role in institutional portfolios through strategic and dynamic allocations
Combining REITs with private real estate can help improve the overall risk-adjusted return profile of a multi-asset portfolio

For further information please contact:

DWS

Joanne Chew
+65 6423 7857/ +65 972 8452
joanne-a.chew@dws.com

Winnie Liu
+852 2203 5143
winnie-a.liu@dws.com

GIC

Mah Lay Choon
+65 6889 6841
mahlaychoon@gic.com.sg

Michelle Leow
+65 6889 8888
michelleleow@gic.com.sg

DWS and GIC co-publish paper on the role of REITs in Real Estate Allocations

Both DWS and GIC believe that REITs merit a place in a multi-asset portfolio for institutional investors. While fundamentally similar, REITs differ from their private counterparts in terms of liquidity as well as geographic and sectoral breadth. Investors can therefore use REITS to complement private real estate in building a diversified portfolio in a cost- and resource-efficient manner.

REITs play important roles in an institutional portfolio

From a strategic allocation point of view, REITs can be used in conjunction with private real estate on a long-term basis to achieve the desired sectoral, geographic, and property type mix. REITS can also be used to temporarily complete real estate allocations while capital is still in the process of being deployed into private properties.

From a dynamic allocation point of view, REITs can provide investors access to tactical opportunities over the short-term, creating additional value. As REITs offer daily liquidity with minimal transaction costs, investors can use them to make tactical adjustments to their overall real estate allocation. REITs can also offer real estate arbitrage-like opportunities between public and private markets.

Vanessa Wang, Head of Asia Pacific, DWS remarked: “Australian investors have started investing in REITs since the early 1970s and consider REITs as substitutes for pure direct property investing as they offer easier liquidity and a chance to own part of a large range of properties. We have noted APAC investors’ usage of REITs to supplement direct property investing as a way to capture market opportunities in between property transactions.”

REITs share characteristics of both equity and real estate

REITs are fundamentally real estate. They own, acquire, develop, sell, and lease properties while their cash flows come primarily from the rents they receive. REITs benefit (or suffer) when their properties’ values increase (or decrease) in the same way as direct real estate investors or private real estate funds. Over longer-term periods, REITs behave very much like real estate, and in fact, the returns of REITS and private real estate have been high correlated over the long-term when adjusted for leverage and liquidity factors.

However, in the short-term, the returns of REITs and direct real estate can diverge, sometimes materially. Over a short-term horizon, REITs exhibit equity-like volatility and drawdowns. REITs trade on stock exchanges and are readily available to investors that otherwise would not be able to purchase property. The intra-day liquidity offered by REITs is one of their greatest benefits when compared to direct real estate as the latter takes time to sell – often months or years.

John Vojticek, Head and CIO of Liquid Real Assets, DWS noted: “Real estate uses and demand drivers continue to evolve. Work from home, e-commerce, aging demographics, and cloud computing are great examples of trends that are writing the next chapter for commercial real estate. Access to deep capital markets has provided REITs the opportunity to be first movers in sectors including storage. data centres, assisted living, and single family homes to name a few. This dynamism provides investors the ability to augment their private real estate portfolios to both participate in this evolution while still staying aligned to exposure objectives.”

REITs can enhance existing private real estate allocation

It is possible that the combination of listed and private real estate can help increase the expected returns of an investor without changing the expected volatility. However, regardless of any changes to volatility or expected returns, using REITs to complement private real asset allocation does increase a portfolio’s liquidity profile. This liquidity advantage and the potential to expand an investor’s real estate opportunity set are just two benefits which REITs can provide institutional investors.

“Today’s challenging investment environment has increased the attractiveness of using real assets to improve inflation resilience and enhance return diversification in institutional portfolios. REITs can be a part of the toolkit for investors to achieve better medium- and long-term outcomes,” said Kevin Bong, Director, Economics, and Investment Strategy, GIC.

Paul Kelly, Global Head of Alternatives, DWS said: “We have confidence in the long-term trends that have supported the growth of the alternatives sector. With our long-standing investment heritage in both private and listed alternatives, DWS is committed to consistently delivering excellence to our clients around the world.”

Please click here for a complete copy of “The Role of REITs in Real Estate Allocations”.

About DWS - Real Estate

DWS has been investing in real estate assets for more than 50 years. As part of the Alternatives platform, the real estate business has nearly 350 employees in almost 25 cities around the world and EUR 82 billion in global real estate assets under management (September 30, 2022). Providing a diverse range of strategies and solutions across the risk/return and geographic spectrums, we offer core, value-added and opportunistic real estate, real estate debt and real estate securities. The real estate investment business employs a disciplined investment approach and aims to deliver attractive long-term risk adjusted returns, preservation of capital and diversification to its investors, which include governments, corporations, insurance companies, endowments, retirement plans, and private clients worldwide.

About DWS Group

DWS Group (DWS) with EUR 821bn of assets under management (as of 31 December 2022) aspires to be one of the world's leading asset managers. Building on more than 60 years of experience, it has a reputation for excellence in Germany, Europe, the Americas and Asia. DWS is recognized by clients globally as a trusted source for integrated investment solutions, stability and innovation across a full spectrum of investment disciplines.

We offer individuals and institutions access to our strong investment capabilities across all major liquid and illiquid asset classes as well as solutions aligned to growth trends. Our diverse expertise in Active, Passive and Alternatives asset management – as well as our deep environmental, social and governance focus – complement each other when creating targeted solutions for our clients. Our expertise and on-the-ground knowledge of our economists, research analysts and investment professionals are brought together in one consistent global CIO View, giving strategic guidance to our investment approach.

DWS wants to innovate and shape the future of investing. We understand that, both as a corporate as well as a trusted advisor to our clients, we have a crucial role in helping navigate the transition to a more sustainable future. With approximately 3,800 employees in offices all over the world, we are local while being one global team. We are committed to acting on behalf of our clients and investing with their best interests at heart so that they can reach their financial goals, no matter what the future holds. With our entrepreneurial, collaborative spirit, we work every day to deliver outstanding investment results, in both good and challenging times to build the best foundation for our clients’ financial future.

About GIC

GIC is a leading global investment firm established in 1981 to secure Singapore’s financial future. As the manager of Singapore’s foreign reserves, GIC takes a long-term, disciplined approach to investing and is uniquely positioned across a wide range of asset classes and active strategies globally. These include equities, fixed income, real estate, private equity, venture capital and infrastructure. Its long-term approach, multi-asset capabilities and global connectivity enable it to be an investor of choice. GIC seeks to add meaningful value to its investments. Headquartered in Singapore, GIC has a global talent force of over 1,900 people in 11 key financial cities and has investments in over 40 countries. For more information, please visit www.gic.com.sg or follow on LinkedIn.

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