bounce back with property investment
In such a scenario, Real Estate Investment Trusts (REITs) provide an effective alternative. This can provide a better diversification strategy for investors looking to reallocate part of their fixed income portfolio while keeping an eye on a potential rise in interest rates.
A REIT is a company that owns, operates, or finances real estate, and it generates rental income and provides an investment opportunity like a mutual fund. It allows investors to profit from valuable real estate, and generates dividend-based income and returns. REITs also help provide capital appreciation.
Going Global to Expand Locally
Globally, most REITs are publicly traded, unlike physical real estate investments. Therefore, they are highly liquid and invest in a wide variety of assets including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, warehouses, cold storage, self-storage and senior living facilities. Therefore, global REITs capture a greater number of topics for diversification than domestic REITs, which currently cover commercial or residential properties. Historically, global REITs have offered the highest long-term returns at 10.4 percent compared to investment options such as private real estate (8.5 percent), stocks (7.5 percent) and bonds (4.5 percent).
REITs, and global REITs in particular, are a highly qualified asset class to add to investors’ portfolios.
staying afloat through the asset bubble
Due to the evolving situation REITs should get more importance. The Covid-19 lockdown has forced governments and central banks to pump in too much liquidity to restart demand and keep economies from sinking, which could eventually lead to the creation of asset bubbles. Therefore, investors need to re-evaluate their asset allocation and realign investments with emerging trends and inflation-interest rate dynamics across different asset classes.
Multi-asset investing is generally considered to be the more flexible way to proceed in such cases. This involves investing in low-correlation or negatively correlated asset classes so that when one asset class is performing poorly, the other can compensate for its good performance. It balances portfolio returns. Studies show that 92 percent of investor returns are the result of solid asset allocation, while only 8 percent of returns are based on stock selection and timing.
Smart Investor’s DIY Strategies
Many investors make their own asset allocation through dynamic asset allocation, by switching from debt to equity and vice versa. Some investors follow a fixed asset allocation like 60:40 in favor of equity or debt depending on their life cycle stage or age criteria. In either instance, investors tend to avoid taking an interest rate or credit call on part of the loan because the debt is only a temporary, symptomatic solution, turning to equity when and when equity valuations become cheaper. In the current times of low interest rates around the world, this allocation to debt generates negligible returns and undermines the overall performance of investor portfolios.
benefit from rising prices
Global inflationary pressures present an opportune time for REITs to outperform bonds and stocks. Inflated prices lead to an increase in real estate rents because leases are directly linked to inflation. The current economic situation is prone to rising inflation. This is beneficial to REITs because higher inflation rates also reflect higher rental income. REITs can act as a natural hedge against the current inflationary environment. In the past, they have outperformed other asset classes, especially in a moderate inflationary scenario.
Over the past four decades, the REIT index has outperformed the S&P 500 by 2%, while stocks have outperformed REITs over the past five years. However, higher inflation will allow REITs to make a stronger return. Indian investors can now gain a lot from global REITs in terms of diversification across geography and currency. It adds an attractive and new dimension to an investor’s portfolio.
Post-lockdown, the immunized economy is bound to make a big comeback and REITs will serve the asset class further as markets stabilize and develop.
(The author is CEO of PGIM India Mutual Fund. Views expressed are personal.)