An Analysis of Relative Return Behavior: Reits vs Stocks

Abstract

We have analyzed the return behavior of the equity REIT, mortgage REIT, and SP500 indices using monthly data for the period of 1972-2001. Following a large monthly gain, investors can benefit by adopting a momentum buying strategy for stocks or mortgage for REITs, but not for equity REITs. Investors can also profitably employ a mean reversion strategy for any of the three indices. They would wait for a large decline and then buy the index and hold it for six months. Significant calendar effects were found for both REIT and stock indices involving positive January, and negative August and October effects, although there are some differences in seasonal effects between REITs and stocks. The correlation coefficients between all three asset classes are similar, but the relationship between stocks and equity REITs has lessened over time. We also show that equity REITs dominate mortgage REITs on a risk-return basis and that REITs compare favorably with stocks. Our findings suggest that equity REITs can enhance the risk-return relationship of an investment portfolio and should be considered as a major asset class just like stocks or bonds.