Introduction: Real Estate Investment Trusts

Article excerpt

Publicly traded real estate investment trusts (REITs) and real estate operating companies (REOCs) have enjoyed a reversal of fortune in the past twelve months. Real estate securities were hit hard by the liquidity crisis of 1998 and suffered continued decline in 1999 as capital markets reevaluated their growth prospects in a maturing real estate cycle. The year 2000 brought superior returns to REIT investors as technology stocks and the broader market retreated. Investors are now faced with the task of understanding REITs and REOCs in a stable environment for both indirect and direct investment in real estate. This special issue contains several views of the role of securities in direct investment portfolios. There are also some critical views of the basic nature of public real estate companies. Taken together, this collection of research and opinion should serve to bring us closer to an understanding of how to successfully integrate direct and indirect real estate investments in one portfolio.

The research reported in this issue is generally focused in two areas. First, several authors look at the role of publicly traded real estate securities in portfolio management for investors in direct real estate equities. Simon Stevenson, in The Long Term Advantages to Incorporating Indirect Securities in Direct Real Estate Portfolios examines the impact of REIT investment in both an optimal and a more probable world. His findings are interesting because they show that REITs bring improved performance to portfolios that look more like the NCREIF portfolio while their marginal value to an optimized direct portfolio may not be evident. The other interesting finding is a significant performance improvement brought by the addition of multi-national property securities to a domestic direct portfolio.

Should investors approach an asset class in the context of their portfolio goals? Timothy Craft explores that issue in The Role of Private and Public Real Estate in Pension Plan Portfolio Allocation Choices. He examines the portfolio allocation choice in the context of a plan's pension liabilities. One interesting result is a resolution of the dichotomy between standard optimization models that often argue for high real estate allocations and the typically lower allocations found in existing plan portfolios.

Michael Seiler, James Webb and Neil Myer test the expectation that private real estate portfolios can be adjusted with real estate securities in Can Private Real Estate Portfolios Be Rebalanced/Diversified Using Equity REIT Shares? They conclude that REITs are a worthwhile addition to mixedasset portfolios but that they do not bring the ability to effectively rebalance or create marketneutral portfolios.

Another view of how the various asset classes interact is found in Jim Clayton and Greg McKinnon's article The Time-Varying Nature of the Link between REIT, Real Estate and Financial Asset Returns. …