• Publicly traded Real Estate Investment Trusts (REITs) can provide benefits to investors such as diversification and current income.
• Bull markets in REITs have historically lasted close to seven years.
• REITs currently exhibit attractive relative valuations.
At SS&C ALPS Advisors, we have long held that exposure to real assets like Real Estate and Commodities can have a positive impact on a portfolio’s risk adjusted returns. Real Estate in particular can provide investors with the benefits of diversification, as REITs exhibit relatively low correlations to other asset classes. Additionally, because REITs are required to distribute most cash flow to shareholders, investors can look to real estate for current income.
After underperforming broad equities significantly over the past five years, we believe there may be a long term opportunity to add REITs to portfolio allocations. Over the past few months we have seen REITs start to outperform again, so naturally some investors may believe that the opportunity has passed. We would argue that historically, REIT bull markets have tended to last several years, as the chart below shows:
During this period, the average bull market for REITs lasted just under seven years, with an average gain of just over 300%. If history is any guide, we may be in the early innings of a bull market.
In addition to this historical reference, the starting point for relative valuations may be attractive as well. The chart below compares the earnings yield (earnings per share (EPS)/price) for the S&P 500 Index minus the REIT adjusted funds from operations (AFFO) yield.
This relationship is near historical lows, indicating valuations for REITs are relatively attractive as compared to the broader market.
The news headlines related to real estate have been focused on the plight of the office sector after the work from home trend during COVID-19. However, office only represents about 3% of the publicly traded REIT universe. A broadly diversified portfolio of REITs would also include several non-traditional sectors with favorable secular trends in place such as data centers, single family rentals, industrial and senior housing REITs.
Given the historical precedent of relatively long REIT bull markets, attractive relative value and exposure to real estate assets with positive secular trends, we believe an allocation to REITs as part of a diversified asset allocation may represent an opportunity for investors.
Important Disclosures & Definitions
Adjusted Funds From Operations (AFFO): a measure of the financial performance of a REIT which takes into consideration the maintenance costs of the real estate property over its life.
Basis Point (bps): a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
FTSE NAREIT All Equity REITs Index: a free-float adjusted, market capitalization-weighted index of US equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.
Real Estate Investment Trust (REIT): companies that own or finance income-producing real estate across a range of property sectors. Listed REITs have characteristics of both the income potential of bonds and growth potential of stocks.
S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
One may not invest directly in an index.
AAI000773 10/08/2025
