Due to their diversification benefits, real estate investment trusts (REITs) make the average portfolio more resistant to turmoil in global property markets, and HNW investors are increasingly turning to REITs, freeing up wealth traditionally locked up in direct property, writes Heike van den Hoevel, senior analyst, wealth management, at Verdict Financial


Real estate investment trusts (REITs) are making the average portfolio more resistant to turmoil in global property markets by providing investors access to a range of different types of real estate. This is particularly significant at a time when the likes of Brexit and a (Donald) Trump administration are leading to volatile market movements on the whole.

Producing attractive growth, REITs have found their way into global high net worth (HNW) portfolios, replacing illiquid direct property holdings. This will have a positive effect on wealth managers’ bottom lines and investors’ portfolios.

Strong run

Fuelled by low interest rates and rising property prices, REITs have enjoyed a strong run over the past few years. For example, the equity market capitalisation of the US REIT industry broke the $1tn mark in Q2 2016, with the 222 REITs in the FTSE NAREIT All REITs Index reporting a combined market capitalisation of $1.06tn – an increase of 7.7% in just one quarter.

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Our data shows that the typical HNW real estate portfolio is increasingly skewed towards non-direct property investments. This is good news for wealth managers given that traditionally direct property has been one of the key constraints on wealth manager growth, contributing little to providers’ fee income.

Diversification benefits

Due to their extreme liquidity and relatively low correlation with both equities and fixed income, REITs have emerged as a preferred type of real estate investment in the HNW space.

This preference is reinforced by the diversification benefits they provide.

Research shows that the returns different types of real estate yield differ strongly over an economic cycle. For example, residential property tends to be the least cyclical, followed by office buildings.

Being subject to consumers’ willingness to spend, retail property is more exposed to economic cyclicity, and unsurprisingly property in the tourist sector tops the list due to being severely affected by economic upswings and downturns.

Naturally, happy investors are happy clients – something wealth managers will appreciate. With more client wealth in REITs rather than traditional bricks and mortar, wealth managers have more assets generating fee income boosting their businesses volume. With both investors and managers benefiting, expect the popularity of REITs to endure for some time.

Source: Verdict Financial’s 2016 Global Wealth Managers Survey