REIT adoption growth: REITs transitioned from niche investments to essential global investment tools, gaining liquidity and transparency.
Benchmark leadership: The FTSE EPRA Nareit Index Series grew to over $1.8 trillion in market cap, setting global standards in real estate investments.
Future potential: Institutional and retail investors under-allocate to REITs, with optimal portfolio allocations suggested between 4% and 20%.
FTSE Russell is excited to celebrate the approaching 25-year anniversary of our partnership with the European Public Real Estate Association (EPRA) and the National Association of Real Estate Investment Trusts (NAREIT), leading non-profit trade bodies for REITs and publicly traded real estate companies. This marks a meaningful milestone for our collaborative efforts to foster global access to commercial real estate returns with the liquidity, transparency, and regulation associated with publicly traded stocks.
Below, we show how listed real estate and the indices which track this asset class have grown to become important components of the modern investment landscape.
Listed REITs: Providing investors with liquid, cost-efficient real estate returns
Investors can gain real estate exposure by acquiring a portfolio of direct property investments—an approach typically only available to institutional investors due to the required capital outlay and liquidity challenges—or by investing in publicly listed real estate companies. For smaller investors, listed real estate is likely the only viable option to obtain diversified exposure to the sector.
The adoption and growth of listed real estate investment trusts (“REITs”) accelerated markedly in the 2000s—and indices have played a key role in this leap forward by helping harmonise the previously fragmented categorisation of REITs, as well as systematising inconsistent reporting standards.
Investors rely on the expertise and professionalism of index providers to develop accurate benchmarks of listed real estate across global markets, based on the in-depth scrutiny of underlying business activities and the ownership of real assets, as well as the screening of core real estate income.
In particular, the FTSE EPRA Nareit Global Real Estate Index Series exemplifies a synergistic partnership which draws on tremendous industry-specific knowledge and proven index proficiency to offer a global solution for benchmarking that adheres to investor and regulatory requirements.
The widespread adoption of REITs and REIT-like structures has contributed to a large increase in the capitalisation of the listed real estate markets. Since 2008, the market capitalisation of the FTSE EPRA Nareit Global Index has grown more than 5 times, exceeding $1.8trn in December 2024, while the number of constituents grew from 353 to nearly 500 over the same period.
As the prominence and usage of REITs and the associated indices has grown, the FTSE EPRA Nareit Global Real Estate Index Series has expanded to include innovative and sophisticated thematic indices, supporting real estate strategies focused on dividends, sustainability, minimum variance and investment factors.
FTSE EPRA Nareit Global Index
Source: FTSE Russell as of December 5, 2024. Please see the end for important legal disclosures.
Over the years, listed REITs have established a demonstrated ability to serve as a proxy for direct property investments. In a study by CEM Benchmarking, sponsored by Nareit, listed equity REIT and unlisted real estate returns were found to be highly correlated when illiquid returns were adjusted for reporting lags. The correlation over a 25-year period was measured as 0.90, unsurprisingly high given the similarities in underlying assets.[1]
The gold standard for accurate, transparent REIT indexes
Today, more than $320 billion total assets track the FTSE EPRA Nareit Index Series, setting it apart as the leading global benchmark series for commercial real estate investment. Designed to represent general trends in listed real estate equities worldwide, the series is:
- Comprehensive – It spans the entire commercial real estate sector of the global economy.
- Modular - Regional, property sector and sub-sector indices are available to facilitate narrowly focused exposure to commercial real estate.
- Investable - The index constituents are screened for liquidity and the indices are market cap-weighted and free float-adjusted to ensure that only the investable opportunity set is included.
- Transparent - Rules-based construction and maintenance rules are publicly available.
Index methodology is a key point of differentiation for the FTSE EPRA Nareit Index Series. Eligibility determinations are based on a bottom-up analysis of each constituent’s annual earnings to ensure purity of exposure to the relevant business activities. This rigorous process brings together expert research teams from FTSE Russell, EPRA, and NAREIT, who leverage on-the-ground experience to screen approximately 2,000 listed real estate firms each quarter. It results in an index constituency that is based on a strict but transparent set of rules, that are designed to maintain a balance between consistency and adaptability and to accommodate various reporting standards and business models.
By implementing constituent-level income analysis, the FTSE EPRA Nareit Index Series is better positioned to replicate direct property investment than other indices which rely on top-down approaches.
construction summary
Source: FTSE Russell, as of September 2024 market open. Please see the end for important legal disclosures.
Looking ahead, there is still significant room for growth within the global institutional investment community. A recent survey showed that while institutions were more active in allocating capital to REITs in 2023, still only 39% reported investing in REITs.[2]
The under-allocation is even more pronounced among retail investors, who could benefit significantly by gaining exposure to commercial real estate: a 2024 Morningstar Associates analysis, sponsored by Nareit, demonstrates that the optimal portfolio allocation to REITs may be between 4% and 20%.[3]
At FTSE Russell, we are committed to continue working alongside our partners, clients and market participants to gather input and respond to developing demands, including the need for customisation and innovative index solutions.
1. Asset Allocation and Fund Performance of Defined Benefit Pension Funds in the United States 1998-2022, CEM Benchmarking, as cited by Nareit, CEM Study: REITs Outperform Private Real Estate by More Than 2.0% in DB Plans, https://www.reit.com/data-research/research/updated-cem-benchmarking-study-highlights-reit-performance
2. 2024 Institutional Real Estate Allocations Monitor, Cornell Baker Program in Real Estate and Hodes Weill & Associates, as cited by Nareit, Largest Institutions Allocate New Capital to REITs, November 2024, https://www.reit.com/news/blog/market-commentary/largest-institutions-allocate-new-capital-reits
3. 2024 Morningstar Analysis Shows the Optimal Allocation to REITs over Lifestages, Nareit, May 2024, https://www.reit.com/news/blog/market-commentary/2024-morningstar-analysis-shows-optimal-allocation-reits-over
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