This paper was originally published in April 2023 and has been updated in June 2026.
The authors would like to thank the previous co-authors Grace Qiu, Harry Huang, Geoff Shaver, and Jason Chen for their invaluable inputs on earlier editions of this paper; Trang Chu Minh and Nurul Asyikin Yusoff from GIC for their editorial contributions; and Heidi Sum, Yixin Chang, and Daoqing Su from DWS for their support in coordination and the overall development of this paper.
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.
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