Role of Real Estate Investment Trusts (REITs) in a Mixed Asset Portfolio: A Review of Literature

Abstract

Extant studies on the role of REITs is a multi-asset portfolio have resulted to diverse and sometimes contradictory conclusions. The previous research finds send mixed signals to investors on the role of this investment vehicle in Kenya being a new structure. This study sought to analyze and critique empirical studies in this subject area since inception to date in the context developed markets of UK, USA, Australia and Malaysia. This study established that over the long run REITs provide diversification benefits and returns to a mixed asset portfolio. The study also found that REITs are highly correlated to small-cap equities in the short run and to behave more like direct real estate in the long run. Likewise, the study found that REITs market returns seem to be systematically related to returns to both stock and bond market. Based on this review, the study recommends that investors should consider allocating REITs to a mixed asset portfolio to diversify returns to both bond and equities and also to exploit inefficiencies in other asset markets. In addition investors should avoid purchasing REITs during financial distress. Whether these results can be replicated in Kenyan Market is an area of further study.