Real estate: Unique properties?

Written by: Global Thought Leadership | May 19, 2017

Source: Bloomberg, as of 3/31/17.  Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line

  • Commercial real estate investments have historically behaved much differently than traditional stocks and bonds—the key to being a useful diversifier.
  • That’s true relative to both US and ex-US securities, as indicated by broad indexes over the past 15 years, the S&P 500 and MSCI World ex-US indexes have shown little correlation to the NCREIF Property Index. 
  • In fixed income, the correlation is actually negative for the Bloomberg Barclays Global Aggregate Bond Index as well as the US Aggregate Index (not shown above).
  • The opportunity for diversification over that period did not come at the expense of unattractive performance. Indeed, the commercial property index outperformed these popular equity and global bond indexes as measured by average annual return.
  • Real estate’s distinctive behavior is largely due to unique characteristics that make the sector more complex than many traditional investments.
  • Liquidity can be lower, information about individual opportunities may be harder to come by and local market conditions drive supply/demand fundamentals.
  • In addition, the capabilities of property management firms and the contractual terms of leases are important considerations in any investment decision.
  • These various idiosyncrasies arguably make it particularly compatible with an actively managed approach where experienced managers apply extensive knowledge of the sector to make selective choices.
  • For more about real estate and active management, see Life, Liberty and the Pursuit of Property.

IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Diversification does not guarantee a profit or protect against loss.

Outperformance does not imply positive results.

Active management does not ensure gains or protect against market declines.