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Concerned About The State Of The Stock Market? Equity REITs Are A Safe Bet


Investors often look for protection in defensive stock sectors during market volatility, seeking returns. But a recent NAREIT report reveals equity REITs perform better than defensive stocks by a long shot during a market correction. 

Defensive market sectors—which include utilities, consumer staples, healthcare companies and the telecom services sector—are commonly expected to perform better than regular stocks when the market climate is uncertain. But NAREIT economist Brad Case (pictured) tells Bisnow turning to these stocks to ward off a crisis may not be the most lucrative plan.

“For people concerned about a downturn in the stock market what do you do? You can always take your money out, but historically speaking that can be a bad idea because people don't know when to get back in,” Brad says. "You’ll want to find a different market cycle, and that’s what REITs give you.”

In the report, NAREIT compared defensive stock market sectors during broad market low points over a 10-year period to REIT performance during the same time, and found that REITs outperformed.

Sharpe ratios for REIT investors during the 10-year period ranged from a 19% decline to a 4% gain, compared to the Russell 3000 Index Sharpe ratio, which ranged from 45% to 17%. Brad attributes the positive gains in REITs to the segment being within its own 18-year cycle—not affected by the average three- to four-year business cycle that affects other equities.


“What separates real estate from business is supply. REITs are a part of the stock market but with different return drivers,” Brad says. “In a sense they are the most defensive sector.”

This will become even more evident once REITs split into their own sector on the Global Industry Classification Standard (GICS). At present REITs are included among the financials—which consists of banks and insurance companies—but next month the sector will break out into its own index.

The split will increase REIT visibility and promote investment for real estate companies that fall within the new sector, enhancing REIT value as a portfolio diversifier. In addition, Brad says the new sector will force money managers who were reluctant to invest in REITs to embrace them.

“Now [fund managers are] going to have to report real estate investments separately and suddenly, giving investors the opportunity to say, ‘Why are you underweight on the sector that’s been the most successful over the years?'”