Adding a real estate component to a por?olio may be a good diversiﬁca<on move. But
strategy and implementa<on are crucial, and before inves<ng, you should consider how
a real estate strategy and the REIT you select may aﬀect your por?olio. Some factors that
may come into play:
Asset coverage. Most ac<vely managed stock funds and indexes include REITs in their
equity holdings. This creates the poten<al for overlapping asset class exposure for
investors who add a REIT component in their por?olio. Trea<ng REITs as a separate
and dis<nct strategy helps you achieve more precise risk exposure in the asset class
weights. For example, investors with signiﬁcant direct ownership in real estate may
want to exclude REITs from the equity component in their por?olio to be[er control
their overall exposure.
REIT category. Equity REITs may operate property in a speciﬁc area of exper<se, such
as retail, oﬃce and industrial, hotels, or health care facili<es. Residen<al REITs own
and operate apartment buildings and mul<-family commercial dwellings, rather than
single-family homes. Mortgage REITs, which lend money directly to real estate
owners or invest in exis<ng mortgages or mortgage-backed securi<es, are generally
excluded from the equity REIT universe because they perform more like ﬁxed income
instruments, with income based on interest payments. Hybrid REITs combine the
strategies of equity and mortgage REITs.
Diversiﬁca1on. As with ﬁnancial assets, owning a broad mix of REITs can help reduce
speciﬁc risk in a por?olio. This diversiﬁca<on eliminates exposure to a single REIT
category, manager style, or geographic region. Also, adding interna<onal real estate
can further enhance the poten<al diversiﬁca<on beneﬁt.
interna<onal REITs are low across countries, regions, and equity markets, making
them a useful complement to equi<es in developed and emerging markets.
REITs carry stock market risk, as well as risks speciﬁc to individual real estate proper<es,
sectors, regional markets, and the opera<ng ﬁrm. The securi<es are also subject to
market pressures that may push share prices above or below the value of the underlying
real estate. However, iden<fying a market premium or discount in a REIT is diﬃcult since
the underlying asset value reported by a REIT is based on an appraisal, which may be
several months old. REIT returns also depend on the buying, selling, and opera<ng
decisions of management.
A manager may adopt risky strategies, such as heavy leveraging or lack of diversiﬁca<on.
They may pay too much for proper<es, acquire poorly performing proper<es, change
strategies regarding property mix, or make other business decisions that compromise
performance. Investors holding foreign REITs or REIT funds are also exposed to risks