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ublicly-traded REITs occupy a unique position, influenced by broader market trends as equities but rooted in real estate assets. This dichotomy has investment officers divided on whether to categorize them as alternatives or equities. Nareit, the association representing listed real estate companies, advocates for including REITs in alternative allocations alongside private real estate.

    A recent CEM Benchmarking study supports this stance, examining 25 years of asset allocation and fund performance from defined benefit pension funds. The study found that REITs outperformed all other asset classes except private equity over the period, with a correlation more closely tied to private real estate than stocks. This is partly due to lower fees for REITs.

    In contrast, the FTSE Nareit All Equity REITs Index finished 2024 up 4.92% after a rough December that saw total returns drop 8.0%. Ed Pierzak, Nareit's senior vice president of research, attributes this to an inverse relationship between 10-year Treasury yields and REIT total returns.

    Despite the challenges, certain sectors performed strongly, with office, specialty, data center, and healthcare REITs finishing the year with over 20% total returns. This is consistent with themes driven by supply and demand fundamentals, such as the high demand for data centers.

    When comparing REIT performance to other indices like the S&P 500 and Russell 200, Pierzak notes that much of REIT performance has been driven by macro factors rather than fundamental REIT characteristics. Historically, however, REITs have performed well in high-rate environments.

    The CEM study also highlights the benefits of including REITs in alternative allocations. With annual net total returns factoring in expenses, REITs rank second only to private equity, and their performance is more closely correlated with private real estate than other asset classes. The study found a 208 basis point difference in net return between REITs and private real estate, largely due to the significantly lower fees associated with REITs.

    Pierzak emphasizes that REITs should be part of a real estate portfolio rather than an equities allocation, citing their high positive correlation with private real estate. He also notes that while some investors may argue that top-performing private managers outperform REITs, CEM's analysis shows that this is not the case across different quartiles and deciles.

    In conclusion, the unique position of publicly-traded REITs as both equities and real estate assets has led to a debate among investment officers on how to categorize them. The CEM study supports Nareit's stance that REITs should be included in alternative allocations alongside private real estate, citing their performance, correlation with private real estate, and lower fees.