Banking for 7 billion and 7 million

GLOBAL INVESTOR 3.06 Basics — 28
In recent years, Real Estate Investment Trusts (REITs) have enjoyed
success around the globe. REITs have not only achieved strong
returns in absolute terms, they have also outperformed the equity
and fixed income markets in many countries. Figure 1 illustrates the
long-term evolution of REITs relative to local stocks and government
bonds in the USA, Australia and the Netherlands. For Australia and
the USA, we can see quite a strong outperformance of REITs versus
equities and bonds since 1990. For the USA, a dollar invested
in bonds in 1990 has tripled in value and a dollar invested in equities
has quadrupled. Invested in REITs, however, the same dollar is
now worth nearly eight times as much.
All in all, this analysis shows that REITs have been established
as a good alternative to the other two traditional asset classes. As
a consequence of their popularity, REITs were also introduced in
Japan (in 2001), Singapore (2002) and France (2003). We expect
REITs to spread further around the globe. The UK has introduced
REIT legislation that opens the way for UK REITs from 2007 onward.
The discussion about introducing REITs has also intensified in Germany.
The potential for the growth of Germany’s publicly quoted
real estate sector is not only reflected in the growing attraction of
the real estate market, but also by structural issues. On the one
hand, a large amount of real estate stock is still in the possession
of non-real-estate-related companies or public institutions in Germany
that would like to generate additional cash by selling their
real estate portfolios. On the other hand, the listed sector is still
very small. The amount of real estate in the possession of German
real estate companies is only about half a percent of commercial
real estate stock. This is quite a low value by international comparison.
The average is around 3% in Europe and around 10% in
the USA and Asia.
Figure 1
REITs relative to local equities and government bonds
3.0
2.5
2.0
1.5
1.0
0.5
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
US REITs vs stocks
AUS REITs vs stocks
Source: Global Property Research, Bloomberg, Credit Suisse
REIT performance vs. stocks and bonds
REITs have outperformed stocks and bonds in Australia and the USA since
1990. In the Netherlands, they have generated around the same returns as
local stocks and bonds in the same period.
NL REITs vs stocks
US REITs vs bonds
AUS REITs vs bonds
NL REITs vs bonds
Favorable correlation properties
Besides the general favorable outlook, REITs are attractive for
investors due to their portfolio-optimizing characteristics. The benefits
of a well-diversified portfolio were brought back to investors’
attention in light of the increased financial market volatility this
summer. As asset prices came under pressure on the back of
increased inflation risks and uncertainties about rate hikes, REITs
performed quite well relative to other asset classes. REITs’ defensive
investment strategy and their relatively high income yields
have provided a cushion in times of increased risk. In addition,
the inflation indexation of rents is likely to have supported prices
of REITs. In most countries, leases for both office and retail properties
are inflation indexed and thus offer investors inflation
protection.
Due to their favorable portfolio-optimizing characteristics, REITs
should be considered for inclusion in portfolios. The main advantage
is a lower correlation to shares and bonds. Put more simply,
REIT prices do not always move in tandem with the movements
of other asset classes. True, they sometimes move in the same
direction, but often not as strongly and at times even move in the
opposite direction of other asset classes. As the diversification potential
of REITs can vary strongly depending on the market environment,
we have taken a look at the correlation between REITs and
equities as well as bonds in various countries. Table 1 shows our
Table 1
Source: Credit Suisse
REITs, equities and bonds
Correlations currently vary across different countries. The strongest
correlation to equities is in the USA, and the strongest correlation to bond
yields is in the USA, Australia and Canada.
Yields on 10-year bonds
Equity markets
USA – ++
Netherlands 0 +
France 0 +
Japan 0 0
Australia – 0
Canada – 0
++ = correlation coefficient higher than 0.5, + = correlation coefficient 0.5 to 0.2,
0 = correlation coefficient 0.2 to –0.2, – = correlation coefficient –0.2 to –0.4.