The REIT market has blossomed over the last ten years into a diverse and vibrant real estate eco-system. As one of the few sectors within the stock market that continues to grow and expand, REITs have attracted increasing attention from institutional investors and sophisticated asset allocators seeking liquid exposure to high quality commercial real estate. With a wide range of property type investments available and market beating historical performance, the REIT market continues to attract capital even as it becomes more complex.
Just as REITs have risen in prominence, multi-factor investing has also surged in popularity in recent years. This is in part due to its excellent historical performance and in part due to its common-sense methodology for actively investing in stocks. Investors looking to implement a strategy focused on value or momentum have realized a multi-factor approach solves many traditional implementation problems and frees them from the emotional and time burden associated with traditional stock picking.
Despite the increasing popularity of both REITs and multi-factor investing, there remains a large void at the intersection of the two industries. Most quants continue to ignore REITs, and most REIT investors continue to embrace fundamentals-based stock-picking approaches.
This makes the REIT market a fertile landscape for enterprising quants. Possibly due to the lack of factor investors in the space, utilizing quantitative tools within the REIT market historically has proven incredibly effective. Since 2010, a model combining value, momentum, and quality factors within the REIT space has returned 18.19% on an annualized basis versus the benchmark at 13.78%, with statistical significance. With an average information coefficient of 0.074, this model shows incredible explanatory power that can be used to enhance REIT focused strategies in a variety of ways.