Direct Real Estate Investment versus Ownership of REIT Stocks

Direct property investment, as opposed to ownership of publicly traded REIT shares, allows the investor to capitalize on benefits of real estate as part of a diversified and balanced investment portfolio. Irrespective of the particular merits of individual companies or investment vehicles, investments in REIT shares and other public real estate investments provide little in the way of true portfolio balanace and diversification. Since the late 1970s, the performance of REIT shares has closely tracked overall equity market performance, resulting in correlation coefficients as high as 0.62, according to published reports. During the same period, the comparable equity market correlation for private real estate has been close to zero. This low correlation further reflects the counter-cyclicality of real estate and its demonstrated potential for performing well when equity markets are in decline. Furthermore, REITs are required to distribute 90% of their operating profits in the form of current income, which may be sub-optimal with respect to their longer term operating strategies. Direct investment in real estate allows private investors to achieve both diversification and tax efficiency.