Do Brazilian REITs depend on Real Estate sector companies or Overall Market?

Real Estate investments have been considered a good tool to provide diversification without increasing risk in a portfolio. Real Estate Investment Trusts (REITs) are a well-known investment alternative to many investors who want to invest in real estate minimizing the liquidity problem, since they have traded shares. However, the fact that REITs have traded shares brings the following question: are these shares driven by a “real estate factor” or they simply follow the overall market variation? This paper aims to discover whether Brazilian REITs return depend on the real estate companies return, on if they follow the overall market, or even any of the alternatives. The correlation between Ifix (Brazilian REITs proxy) and Imob (a Brazilian real estate sector index), as well as the correlation between Ifix and Ibovespa index, which represents the overall Brazilian market, were estimated by the Dynamic Conditional Correlation (DCC) model of Engle (2002).Our results show that both correlations were not significant, although the correlation between REITs and Ibovespa appear to be slightly higher than the one between REITs and Imob. These results, combined with the fact that Ifix index presents higher average return and smaller standard deviation, indicate that it may be interesting for the investor to include a Brazilian REIT share in his portfolio, since it would contribute to increase portfolio return without assuming more risk.