Academic journal article Journal of Real Estate Portfolio Management

The Role of Non-Traditional Real Estate Sectors in REIT Portfolios

Academic journal article Journal of Real Estate Portfolio Management

The Role of Non-Traditional Real Estate Sectors in REIT Portfolios

Article excerpt

Executive Summary.

Recent years have seen increased attention given to the real estate investment opportunities available from the non-traditional real estate sectors such as self-storage, healthcare, and other specialty real estate sectors. In particular, these non-traditional real estate sectors in equity REITs currently account for over $43 billion in 23 REITs, representing 14.5% of the equity REIT sector market capitalization. This paper will assess the performance of these non-traditional real estate sector REITs compared to traditional sector REITs from 1994:Q1 through 2005:Q3. In particular, their risk-adjusted performance and portfolio diversification benefits will be compared to the more traditional REIT sectors (office, retail, industrial, residential, etc.) and to real estate, stocks, and bonds. Sub-period analyses will also be performed to assess whether the investment dynamics and portfolio diversification benefits for these non-traditional real estate sector REITs have been enhanced in recent years.

Institutional investors have traditionally largely concentrated on low-risk core real estate portfolios of office, retail, and industrial properties. However, recent years have seen significant capital inflows available for real estate, which combined with a shortage of quality commercial properties and strong competition between investors, has seen subsequent reduced yields (Lowrey, 2005). This mismatch between available funds and available core real estate assets has also seen institutional investors expand their focus beyond these traditional real estate sectors to consider higher risk value-added real estate and opportunistic real estate (DB RREEF, 2005; and Lowrey, 2005).

This expansion has increased the attention given to the real estate investment opportunities for enhanced returns from the non-traditional real estate sectors such as self-storage, healthcare, retirement, and specialist sectors (e.g., timberland, communication tower sites, movie theatre complexes). This has been further enhanced due to the demographic shift with the aging population (e.g., demand for retirement and healthcare services) and high-density living, downsizing to smaller properties, and businesses outsourcing their storage requirements (e.g., demand for self-storage).

Extensive literature is available regarding the role of the core real estate sectors (both direct and indirect) in mixed-asset portfolios (e.g., Ziering and Mclntosh, 1997; Benjamin, Sirmans, and Zietz, 2001; Seiler, Webb, and Myer, 2001; and Mueller and Mueller, 2003); however, only limited research has been conducted regarding these non-traditional real estate sectors. This includes self-storage (Severino, 2005), seniors housing (Lowrey, 2005), healthcare (Terris and Myer, 1995), timberland (Caulfield, 1994; and Thompson, 1997), and farmland (Lins, Sherrick, and Venigalla, 1992; and Hardin and Cheng, 2005). Importantly, these nontraditional real estate sectors often have different key features to the traditional real estate sectors for investors to assess in formulating their real estate portfolio strategies; these include the operating business being linked with the real estate assets, difficulties predicting cashflows, a lack of consistent and long-term performance measures, small size of these niche markets, lack of investor experience with non-traditional real estate sectors, need for revised fund mandates to invest in these sectors, and whether these sectors should be regarded as "real estate" or "real estate-related" (DB RREEF, 2005).

Given this increasing investor interest in the nontraditional real estate types and the concurrent growth of the non-traditional real estate real estate investment trust (REIT) sectors, this paper will assess the performance of the three nontraditional real estate REIT sectors-self-storage, healthcare, and specialty-from 1994:Q1 through 2005:Q3, particularly highlighting their riskadjusted performance and portfolio diversification benefits compared to the more traditional REIT sectors and to real estate, stocks, and bonds. …

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