The case for REITs

Joshua Varghese's picture

The biggest news that has gotten even the most lively of boring REIT analysts excited has been the recent Global Industry Classification Standard (GICS) index inclusion of real estate as its own sector. Just reading that previous sentence makes me feel dull. Though I do believe it has serious significance.

This is the first time in its almost 20 year history that the GICS has added a new sector to its model. This means real estate, previously lumped in with the financials sector, will have a sector of its own. While there is debate over how much incremental demand this will cause (or has already caused), I believe the most important takeaway is the increasing and continuing recognition that real estate is getting as an asset class. The GICS news prompted Cohen & Steers, the world’s largest REIT manager to write a report on real estate and its well-deserved position in a complete portfolio. Click here to view the report if you’re interested in reading it.   

Here is a very interesting chart that caught my eye:

What I found most interesting is the correlation analysis. Contrary to many investors’ beliefs, real estate is neither a “rates play” nor an “equities play.” It is an asset class of its own and has a place in a well-balanced diversified portfolio. It has delivered strong returns over its history and it is important to note that the time frame provided in the above chart is a very comprehensive period – it includes a couple of full cycles which would include recessions, recoveries and Fed tightening and easing cycles.

That said, after seven years of outsized, strong commercial price appreciation, some reflection on current REIT pricing is warranted. My view is that broadly speaking, REITs are fairly valued. I would not be buying an index-heavy strategy here. However, I believe property types in certain geographies have well underpinned values and are run by very exceptional management teams. Due to ongoing market volatility, I have been able to find some world class real estate companies trading at very large discounts to net asset value. It is in these names that I see very attractive risk/reward asymmetries.
 
The Cohen and Steers report is one of many recent research pieces that have been highlighting the benefits of real estate in a long-term portfolio. However, not all real estate companies perform the same – contrary to many investors’ beliefs. We believe a bottom-up, well-disciplined strategy does best through full cycles.

As a firm, Signature has two decades of experience managing one of the largest pools of real estate in Canada, specifically as a sleeve within our multi-asset balanced funds. Signature High Income Fund has approximately 10% in real estate as we believe this asset class has a predictable and growing cash flow, inflation protection and is underrepresented in clients’ portfolios. We believe real estate exposure will continue to be a source of positive and consistent growth. 

In addition to receiving real estate exposure through our balanced funds, in 2015 we launched the Signature Real Estate Pool. In the spring of 2016 I created an overview of our experience managing real estate. Click here to view it. This fund provides clients with a unique opportunity to add real estate exposure while maintaining the liquidity of a mutual fund. 


Disclaimer
This commentary is published by CI Investments Inc. It is provided as a general source of information and should not be considered personal investment advice or an offer or solicitation to buy or sell securities. Every effort has been made to ensure that the material contained in this commentary is accurate at the time of publication. However, CI Investments Inc. cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein. This report may contain forward-looking statements about the fund, its future performance, strategies or prospects, and possible future fund action. These statements reflect the portfolio managers’ current beliefs and are based on information currently available to them. Forward-looking statements are not guarantees of future performance. We caution you not to place undue reliance on these statements as a number of factors could cause actual events or results to differ materially from those expressed in any forward-looking statement, including economic, political and market changes and other developments. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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