REITs as an asset class: an empirical investigation of its performance

Abstract

In this paper I will investigates whether the performances of REITs are similar to physical real estate. Moreover, I will compare their returns with other asset classes such as stocks and bonds. The high performances and the idea that REITs are a good instrument to gain real estate exposure and diversify from equity investments, made the asset class appear very attractive to both small and Institutional investors. Contrary to popular belief the analysis will show a weak relationship between REITs performances and the Home Price Index due to numerous factors, most importantly the latter does not take into account the rent component in the Income, which is influenced by business and economic cycles. Furthermore, the findings suggest that most likely REITs offer an equity premium since their performance is strongly linearly correlated to the Equity market, especially the small capitalization stocks Index.