The REIT Mix: Examining the Case of European Listed Real Estate within a Multi-Asset Investment Portfolio

The continued roll-out of Real Estate Investment Trusts (REITs) around the world offers investors expanded investment horizons as well as increased diversification opportunities. Within Europe, REITs continue to trade at a discount to NAV making equity raising problematic and with banks continuing to show reluctance to lend to the real estate asset class alternative sources of finance (most notably bonds) are being sourced in order to capture investment/development opportunities and to avail of the 'added value' and 'diversification benefits' afforded by mergers and acquisitions. Whilst the European REIT market (most notably in France and the UK) exhibits increasing levels of maturity and sophistication, the contemporaneous relationship and performance attributes of REITs vis-à-vis direct real estate remains a subject of contention. In particular, the extent to which securitised forms of real estate are a 'proxy' for direct holdings and deliver the 'real estate effect' benefits required by investors continues to be contested. In an asset class disaggregated into national and sub national markets, bounded by differing socio-economic, legal and cultural contexts, questions remain regarding substitutability of direct and listed forms, both within and between countries. Concerns also pertain regarding the temporal aspect of the relationship – with considerable implications for interpretation of market activity and trends, multi-asset portfolio construction as well as 'buy-hold-sell' decision making.This research paper explores the rationale for including REITs within a European multi-asset investment portfolio. A diverse spectrum of analytical techniques including lead-lag correlation and Granger Causality measure alignment between REITs and direct real estate performance within Europe. Optimal portfolio analysis will serve to demonstrate the role of listed real estate within a multi-asset investment portfolio in terms of both risk diversification and performance enhancement.