GLOBAL - Real Estate Investment Trusts (REITs) are still solid, long-term investment choices despite their recent poor returns, according to Standard & Poor's (S&P) latest global property and REIT report.
Financial data provider S&P has unveiled data showing REIT yields increased in the third quarter of 2008, as Asia-Pacific REITs recorded the highest yield of 8.7%, while the US REITs generated a lower yield of 5.23%.
That said, the S&P Developed REIT Index, which measures 280 REITs in 10 developed countries, has fallen 14.27% since the beginning of 2008, compared with S&P's Developed BMI and Developed Property Indices, which have fallen 24.08% and 23.84% respectively.
It is under these conditions that long-term investment appears to be a smart move, suggests S&P, as 10-year annual returns for S&P Developed Property and S&P Developed REITs indices still delivered 11.37% and 12.06% respectively, demonstrating REIT and property sectors show long-term strength and stability, according to the report.
It's a view shared by Meredith Despins, vice president of investment affairs and investor education at the National Association of Real Estate Investment Trusts in the US, as evidence suggests more investors are holding REITs.
"As the REIT market has matured, we are seeing more and more pension funds investing in REITs and I think there are a number of reasons why: the liquidity of REITs and their ability to access markets and property types in an efficient manner. Many pension funds use REITS as a compliment to their real estate portfolios," said Despins.
"It depends on the role that they are intended to play in pension funds' portfolio. In many cases pension plans are investing in REITs and holding them for the long-term as that is the way they want to gain exposure to the real estate market," she continued.
REITs' high liquidity, past stable returns and guarantees of a regular income distribution make them attractive investment propositions for pension funds, she suggests.
"Pension funds use REITs for tactical purposes because of their liquidity," said Despins.
"The market has matured and the ability to use them as a tactical tool in their portfolios is important. Transparency, governance and alignment of assets is what pension plans are going to be valuing. REITs have a very moderate level of leverage. So they have a flexibility in the markets," She added.
According to Despins, US pension funds using REITs strategically and giving "large, explicit allocations" to REITs include the Ohio Public Employees Retirement System (OPERS), California State Teachers' Retirement System (CalSTRS) and California Public Employees' Retirement System (CalPERS).
CalPERS, which total plan assets of $233.4bn (€187bn) and $23.6bn in real estate assets at the end of August 2008, currently invests more than $2bn in REITs but does not intend on changing its long-term investment strategy any time soon.
"We have no plans before the board to change the REIT strategy going forward," said Clark McKinley, spokesperson for CalPERS.
"Investments are opportunistic, deal-driven and partners continue to make calls to draw down initial capital investments," he added.
That said, anecdotal evidence suggests the number of pension funds investing in REITs over long periods of time is understated because pension funds treated equity and REITs as the same in the past and did not reveal whether they invested in REITs.
Looking again at the data, the S&P Global REIT Index showed Canada had the highest returns over a 10-year period, at 15.9%, followed by the Netherlands at 15.6% and the US at 12.85%.
This differs greatly to the returns recorded in the last 12 months, however, which have all been negative.
S&P Europe Property and S&P Europe REIT Indices were down by 18.7% and 10.13% respectively, indicating the severe deterioration of the European credit markets.
But healthcare, storage and residential properties were the most popular property types among REITs investors, while industrial and office properties were the least popular.
The Global Property and REIT Report highlights the developments in the property and REIT markets that have been recorded by S&P's indices. It monitors the different investment vehicles available and identifies the latest global and regional trends by comparing performances, yields, volatility and price/earning ratios.