Are Diversified REITs More Attractive?

Diversifying REITS

REITs are classified into several sub-sectors, such as industrial, commercial, residential, health care and retail. A diversified REIT portfolio typically includes a mix of at least two property sub-sectors.
Diversified REITs own, manage and generate rental income from a combination of different property types.
To minimize risk, diversification is crucial in any investment portfolio. Likewise, concentrating investments in a single REIT or several REITs with similar investment strategies, property types, or geographical regions may expose investors to unnecessary risks.

Invest in different geographical regions: Economic conditions, market trends, and government policies vary with different regions hence investing in REITs from different geographical locations helps to diversify your portfolio and minimize the risk associated with a specific region.
Invest in different types of properties: REITs invest in various property types i.e. office, retail, residential, industrial, purpose built student accommodation and healthcare. Each property type has its investment cycle and responds differently to market conditions. A mix of property types can help reduce the risk associated with a specific property type.

Maximizes returns: Different REITs have different growth potential and income streams. By investing in a variety of REITs, investors can benefit from a range of growth opportunities and income streams. In addition, diversification can also help investors to avoid overconcentration in any one REIT, which can lead to underperformance if that particular REIT experiences a downturn.
Access to new investment opportunities: This is because different types of REITs perform differently in various market cycles. By investing in a diverse range of REITs, you can tap into these different market cycles and potentially benefit from their performance.
Minimizes risk: Investing in a single REIT or several REITs with similar investment strategies, property types, or geographical regions exposes investors to risk that may affects a certain asset class. Through diversification, such risks are spread across various property types, and thus provides a more stable investment portfolio.

Diversification is an important strategy for any investor, and this is particularly true for REITs.
By diversifying your REITs across different types of properties, geographical regions, and management styles, you can minimize risk and maximize returns.
In addition, using ETFs or mutual funds can provide instant diversification and liquidity. As always, it is important to consult with a financial advisor to determine the best diversification strategy for your individual needs and goals.

Source: National Association of Real Estate Investment Trusts, The Balance & Sterling Real Estate Advisory