Bouncing back with investment in property
In such a scenario, Real Estate Investment Trusts (REITs) offer an effective alternative. It can provide an improved diversification strategy for investors looking to re-allocate portions of their fixed income portfolio with an eye on a potential rise in interest rates.
A REIT is a company that owns, operates or finances real estate, and it produces rental income and provides an investment opportunity, like a mutual fund. This lets investors benefit from valuable real estate, and get 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 range of property types, including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, warehouses, cold storage, self-storage and senior living facilities. Hence, global REITs capture a larger number of themes for diversification, better than domestic REITs, which largely cover commercial or residential properties currently. Historically, global REITs have offered the highest long-term returns at 10.4 per cent as compared with investment alternatives like private real estate (8.5 per cent), stocks (7.5 per cent) and bonds (4.5 per cent).
REITs, and particularly global REITs, are a highly worthy asset class to add to investors’ portfolios.
Staying afloat through asset bubbles
REITs should gain more importance because of a developing situation. Covid-19 lockdowns saw governments and central banks pump in a lot of liquidity to reignite demand and save economies from sinking, which may eventually lead to the creation of asset bubbles. Hence, investors need to reassess their asset allocation and realign investments with the evolving trends in various asset classes and the inflation-interest rate dynamic.
Multi-asset investment is commonly regarded as the more resilient way to go forward in such cases. It involves investing in low correlation or negatively correlated asset classes so that when one asset class is underperforming, the other one makes up for it by its good performance. This balances the portfolio returns. Studies show that 92 per cent of investor returns are the result of cogent asset allocation, whereas just 8 per cent of returns are based on stock selection and timing.
DIY strategies of the smart investor
Many investors do 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 favour of equity or debt, based on their life cycle stage or age criteria. In either instance, investors refrain from taking interest rate or credit calls on the debt portion as debt is only a temporary, symptomatic solution, which gets switched into equity as and when equity valuations become cheaper. In the current times of low interest rate across the globe, this allocation to debt generates negligible returns and drags down the overall performance of investor portfolios.
Benefiting from rising prices
Global inflationary pressures present a suitable time for REITs to outperform bonds and stocks. Increased prices lead to an increase in real estate rents as leases are directly tied to inflation. The current economic state is prone to rising inflation. This is advantageous for REITs as high inflation rates also reflect higher rental incomes. REITs can function as a natural hedge against the current inflationary environment. In the past, they have outperformed other asset classes, especially in a moderate inflation scenario.
Over the past four decades, the REITs Index has performed better than the S&P 500 by 2 per cent, while in the past five years, stocks have outperformed REITs. However, higher inflation would allow REITs to have a strong comeback. Indian investors can now gain a lot from global REITs in terms of diversification in geography and currency. It adds an attractive and new dimension to an investor’s portfolio.
The post-lockdown, vaccinated economy is bound to make bigger comebacks and serve the REIT asset class further as markets stabilise and grow.
(The author is CEO, PGIM India Mutual Fund. Views expressed are personal.)
