The Role of REITs in Real Estate Allocations

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The Role of REITs in Real Estate Allocations

8/3/2026

2026 LRA Whitepaper

John Vojticek

Head and Chief Investment Officer of Liquid Real Assets

Reece Porich

Senior Portfolio Management Specialist – Liquid Real Assets

Justin Miller

Portfolio Specialist, Liquid Real Assets

Annie Del Giudice

Senior Product Specialist – Alternatives

Ivan Chong Wei Yang

Vice President, Total Portfolio Strategy Group GIC

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ABSTRACT

REITs are fundamentally real estate, exhibiting high correlations and similar returns over long periods. They offer investors greater liquidity than direct real estate, although prices may diverge in the short term.
REITs offer an expanded opportunity set, providing diversified sector exposure at smaller capital outlays. They allow for efficient and timely capital deployment, both complementing and temporarily substituting private real estate.
Short-term divergences between REITs and private real estate can present tactical opportunities. When trading at a discount to NAV, REITs have historically demonstrated strong absolute and relative returns over subsequent three-year periods.
Combining REITs and private real estate may improve risk-adjusted returns. In our back-test, a 90/10 allocation of private to listed real estate produced the highest return per unit of risk.

Introduction and summary

Allocations to real estate have long been an important building block for constructing multi-asset portfolios, offering investors meaningful long-term return potential, inflation protection, and diversification benefits. Yet Real Estate Investment Trusts (REITs) are often overlooked by institutional investors. Equity investors frequently avoid them, even when present in their benchmark, claiming they are too expensive or lack the growth potential of other equity sectors, while direct real estate or alternatives investors often dismiss REITs as too volatile compared to direct property or private real estate funds.

We believe that REITs merit a place in real estate allocations, providing important levers to build more complete and efficient institutional portfolios. In this paper, we demonstrate that REITs exhibit both equities and real estate characteristics. REITs have real estate-like cash flows but are subject to listed equity-like discount rate fluctuations.

Over shorter time horizons, discount rates dominate, and REITs exhibit public equity-like volatility and drawdowns. Over the long term, discount rates tend to mean revert and cash flows drive returns, resulting in an eventual convergence with the underlying real estate. With these characteristics in mind, we explore two important roles REITs can play in an institutional investor’s portfolio:

Strategic allocation: REITs can complement private real estate by enabling geographic and sector diversification in a cost- and resource-efficient manner. They can also be used to temporarily complete real estate allocations while capital is being deployed into private properties.
Dynamic allocation: REIT pricing can serve as a leading indicator for real estate markets, and relative value opportunities between REITs and private real estate may arise. REITs also offer the flexibility to quickly adjust the overall allocation, sector mix, or risk profile of a real estate portfolio.

Finally, we demonstrate that by combining REITs with direct real estate holdings or private real estate funds, it may be possible to improve the overall risk-adjusted return profile of a real estate portfolio.

The Role of REITs in Real Estate Allocations

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