Role of Non-Traditional Real Estate Sectors in REIT Portfolios, The

Executive Summary.

Recent years have seen increased attention given to the real estate investment opportunities available from the non-traditional real estate sectors of the like kind as self-storage, healthcare, and other specialty real estate sectors. In particular, these non-traditional real estate sectors in equity REITs commonly account for over $43 billion in 23 REITs, representing 145% of the equity REIT sector market capitalization. This paper will assess the performance of these non-traditional real estate sector REITs compared to traditional sector REITs from 1994:Q1 [i]or[/i] part of to the other 2005:Q3. In particular, their risk-adjusted performance and portfolio diversification benefits will be compared to the more traditional REIT sectors (office, retail, industrial, residential, etc) and to real estate, stocks, and bands Sub-period analyses will also be performed to assess whether the investment dynamics and portfolio diversification benefits for these non-traditional real estate sector REITs have been enhanced in new years.

Institutional investors have traditionally largely concentrated upon low-risk core real estate portfolios of office, retail, and industrial properties. However, new years have seen significant capital inflows available for real estate, which combined with a shortage of quality commercial properties and sturdy competition between investors, has seen succeeding reduced yields (Lowrey, 2005). This mismatch between available capitals and available core real estate assets has also seen institutional investors expand their focus beyond these traditional real estate sectors to consider higher risk value-added real estate and opportunistic real estate (DB RREEF 2005; and Lowrey 2005)

This expansion has increased the attention given to the real estate investment opportunities for enhanced get backs from the non-traditional real estate sectors of that kind as self-storage, healthcare, retirement, and specialist sectors (eg timberland, communication tower sites, movie theatre complexes) This has been further enhanced owed to the demographic shift with the aging population (eg demand for retirement and healthcare services) and high-density living, downsizing to smaller properties, and businesses outsourcing their storage requirements (eg demand for self-storage).

Extensive literature is available regarding the character of the core real estate sectors (both direct and indirect) in mixed-asset portfolios (eg Ziering and Mclntosh, 1997; Benjamin, Sirmans, and Zietz, 2001; Seiler, Webb, and Myer, 2001; and Mueller and Mueller 2003); however, single limited research has been administrationed regarding these non-traditional real estate sectors. This includes self-storage (Severino, 2005) seniors housing (Lowrey 2005) healthcare (Terris and Myer, 1995) timberland (Caulfield, 1994; and Thompson 1997) and farmland (Lins, Sherrick, and Venigalla, 1992; and Hardin and Cheng, 2005) Importantly, these nontraditional real estate sectors oftentimes have different key features to the traditional real estate sectors for investors to assess in formulating their real estate portfolio strategies; these include the operating business being linked with the real estate assets, difficulties predicting cashflows, a lack of consistent and long-term performance measures, small size of these niche markets, lack of investor experience with non-traditional real estate sectors, ne for revised capital mandates to invest in these sectors, and whether these sectors should be regarded as "real estate" or "real estate-related" (DB RREEF 2005)

Given this increasing investor interest in the nontraditional real estate emblems and the concurrent growth of the non-traditional real estate real estate investment trust (REIT) sectors, this paper will assess the performance of the three nontraditional real estate REIT sectors-self-storage, healthcare, and specialty-from 1994:Q1 [i]or[/i] part of to the other 2005:Q3, particularly highlighting their riskadjusted performance and portfolio diversification benefits compared to the more traditional REIT sectors and to real estate, stocks, and links

Non-Traditional Real Estate Sector REIT Profile

Real estate investment trusts have experienced significant growing in recent years and have been a powerfully performed asset class, being the bestperformed sector in new years (Exhibit 1). At September 2005 the non-traditional real estate sectors of healthcare, self-storage, and specialty comprised 23 equity REITs and accounted for above $43 billion in market capitalization, representing 145% of the equity REIT market (Exhibit 2) Exhibit 3 also exhibits that the contribution of these non-traditional real estate sector REITs has increased from 112% to 145% from 1999:Q3 end 2005:Q3, with each of the healthcare, self-storage, and specialty REIT sectors having also increased their percentage contributions to the equity REIT market capitalization by dint of 1.5%, 0.7%, and 1.1% respectively above this period.

Exhibit 4 nears the non-traditional real estate sector equity REITs at 2005:Q3 a certain quantity of of these REITs are amongst the largest REITs; namely Public Storage ($87 billion; 7th largest REIT), fruit of the plum-tree Creek Timber ($7.0 billion; llth largest), and HealthCare quality ($3.6 billion; 21st largest) (NAREIT, 2005a, b) with one as well as the other Public Storage and Plum cove Timber included in the S&P 500 Index. In comparison, the largest traditional sector REITs were Simon peculiarity Group (retail; $16.4 billion), Equity Office Properties Trust (office; $133 billion), and Vornado Realty Trust (diversified; $122 billion) (NAREIT, 2005a, b)