An excellent summary of exactly what happened with REITS. I agree, it’s surprising that unit trusts which collect money from shopping centers, office towers, and warehouses, would suddenly become deemed worth so little.
We know that property trusts were in 2008, carrying high amounts of leverage, and that included the A-REITs as well. We know that in the US, jobs were slashed, many business went bankrupt, so that would suggest that US-REITs had legitimate problems to worry about.
In Australia, we had a shock, our economy slowed, but it didn’t even go into recession. This suggests our REITs should have been fairly stable, if valued on their rental income alone. The problem with listed REITs is they’re treated like shares and often fall and rise with the rest of the market. But how closely are the two correlated? And over time, are A-REITs distinct enough from shares to be a valid, separate asset class that adds diversification to your portfolio?
I’ve pulled up the side-by-side data of the ASX and A-REITs. If they’re a valid form of diversification, then we’d expect them not to rise and fall in lockstep with the ASX. Let’s see.
I’ve highlighted in yellow, every year where the ASX and the A-REITs both had either positive years or negative years together.
We can see there’s a strong correlation between shares and reits: 26 years they were in-step, 4 years property went against the ASX.
But that could simply mean that shares and property tend to go up over time. If we focus on the times when the ASX lost money, we find that 3 times REITs didn’t lose money and 2 times when they did.
Statistically, the correlation between the ASX and A-REITs over that time period is 0.666 (insert demonic laugh here). So we know the assets are positively correlated, and resonably so.
A-REITs are definitely not a hedge against ASX stocks, and definitely don’t perform like bonds. Most of the time they move in syc. Whether they’re uncorrelated enough to make them a worthwhile, separate asset class to invest in, I’m undecided. My initial reaction is, probably not.
Based on that data, I’d be interested to hear whether people consider A-REITs to be worthwhile as a separate class or not.