Are REITs a Distinct Asset Class?

Abstract

Real estate investment trusts (REITs) are often considered to be a distinct asset class. But, do REITs deserve this designation? While exact definitions for asset class vary, a number of statistical methods can provide strong evidence either for or against the suitability of the designation. The authors step back from the established real estate and REITs literature and answer this broader question. Beginning with a set of asset class criteria, the authors then utilize a variety of statistical methods from the literature and factor-based asset pricing to evaluate REITs for their candidacy as a distinct asset class. REITs fail to satisfy almost all of the relevant criteria leading the authors to conclude that REITs, in fact, are not a distinct asset class but do deserve a market capitalization weighted allocation in a diversified investment portfolio.

Keywords: REIT, asset class, factor model

JEL Classification: G11, G12, R30