Why are no REIT funds attempting to proxy the real estate market?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
cat_guy
Posts: 199
Joined: Sun Mar 08, 2020 1:45 pm

Why are no REIT funds attempting to proxy the real estate market?

Post by cat_guy »

From my understanding, REIT funds use the market cap of the REITs they are composed of (which are in turn probably the largest ones available) to determine proportion within the fund.

Some quick research suggests that residential real estate is a much larger portion of the real estate market than commercial.

But of course a lot of that is tied up in single-family ownership and isn't owned by any company.

So, REIT funds are composed of what they have available, which ends up being mostly commercial real estate (80% or more?)

This is how most funds, REIT or otherwise, are composed, and that's fine, but...

Wouldn't it be interesting to try to proxy the actual real estate market with a fund?

This would translate into overweighting residential REITs so they match the actual market.

I'm guessing the main complaint here is going to be "residential REITS own multifamily and apartment buildings, which have different market dynamics than single-family homes, so it's impossible to truly proxy the actual market".
User avatar
David Jay
Posts: 14586
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by David Jay »

I think you have made the arguments well.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Marseille07 »

cat_guy wrote: Thu Jun 01, 2023 9:18 pm Wouldn't it be interesting to try to proxy the actual real estate market with a fund?

This would translate into overweighting residential REITs so they match the actual market.

I'm guessing the main complaint here is going to be "residential REITS own multifamily and apartment buildings, which have different market dynamics than single-family homes, so it's impossible to truly proxy the actual market".
I don't understand your suggestion. REITs exist so that you can get a piece of proceeds from a landlording business running multifamily and apartment buildings.

What do you get out of single-family homes? Landlording them is possible but not as profitable as multi-family, so your ROI won't be as good.
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Northern Flicker »

Correction: REIT index funds hold publicly traded REITs at market cap. Many exclude mortgage REITs.

Actively managed REIT funds may hold a very different portfolio.
unwitting_gulag
Posts: 665
Joined: Mon Dec 05, 2016 3:37 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by unwitting_gulag »

Marseille07 wrote: Thu Jun 01, 2023 10:32 pm What do you get out of single-family homes? Landlording them is possible but not as profitable as multi-family, so your ROI won't be as good.
I'd personally like a financial-vehicle that allows me to profit from appreciation in America's owner-occupied single family houses, without actually owning any houses, or being a landlord, or having anything to do with multi-family dwellings.

The appeal would be akin to that of an index fund. If I happen to live in East Bumble, and over in East Bumble we have minimal property-value appreciation because we're in the Rust Belt, our job market soured in the 1980s, and never really recovered, well, by investing in this "index fund", I can benefit from housing market gains in Seattle, Rayleigh, Sarasota FL, Los Angeles and so on. There is diversification benefit - if a few local markets founder, others still thrive. There's the enormous benefit of avoiding concentration risk. If one particular house ends up being lemon, requiring a complete redo of the foundation, or something similarly catastrophic - OK, doesn't matter, because slices of millions of other houses in the index spread the risk around.

The economist Robert Shiller suggested something similar, in his "home price futures market". But the word "futures" scares me... very un-BH, to say the least. One wonders: why hasn't this "market" enjoyed much traction? Is there a nasty catch?
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Marseille07 »

deleted
Last edited by Marseille07 on Fri Jun 02, 2023 4:53 pm, edited 1 time in total.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by 000 »

https://finviz.com/screener.ashx?v=111& ... esidential

https://www.ishares.com/us/products/239 ... estate-etf

One problem in trying to use the 2 stocks AMH and INVH to represent SFH residential real estate is the high manager concentration risk. But it is interesting how closely they have tracked: https://www.portfoliovisualizer.com/bac ... ion3_3=100

Otherwise it probably is reasonable to believe that non-SFH residential REITs are a better match than general REITs (especially since many large REITs now are data centers), but still the dynamics are different. During pandemic for example, SFH prices skyrocketed while landlord revenue was delayed.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by 000 »

unwitting_gulag wrote: Fri Jun 02, 2023 1:14 am I'd personally like a financial-vehicle that allows me to profit from appreciation in America's owner-occupied single family houses, without actually owning any houses, or being a landlord, or having anything to do with multi-family dwellings.
What about reverse mortgages? Could some type of fund (not one with daily liquidity) invest in those?
unwitting_gulag wrote: Fri Jun 02, 2023 1:14 am The economist Robert Shiller suggested something similar, in his "home price futures market". But the word "futures" scares me... very un-BH, to say the least. One wonders: why hasn't this "market" enjoyed much traction? Is there a nasty catch?
Saw this link before, no personal familiarity. https://www.homepricefutures.com/
seajay
Posts: 1656
Joined: Sat May 01, 2021 3:26 pm
Contact:

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by seajay »

unwitting_gulag wrote: Fri Jun 02, 2023 1:14 am
Marseille07 wrote: Thu Jun 01, 2023 10:32 pm What do you get out of single-family homes? Landlording them is possible but not as profitable as multi-family, so your ROI won't be as good.
I'd personally like a financial-vehicle that allows me to profit from appreciation in America's owner-occupied single family houses, without actually owning any houses, or being a landlord, or having anything to do with multi-family dwellings.

The appeal would be akin to that of an index fund. If I happen to live in East Bumble, and over in East Bumble we have minimal property-value appreciation because we're in the Rust Belt, our job market soured in the 1980s, and never really recovered, well, by investing in this "index fund", I can benefit from housing market gains in Seattle, Rayleigh, Sarasota FL, Los Angeles and so on. There is diversification benefit - if a few local markets founder, others still thrive. There's the enormous benefit of avoiding concentration risk. If one particular house ends up being lemon, requiring a complete redo of the foundation, or something similarly catastrophic - OK, doesn't matter, because slices of millions of other houses in the index spread the risk around.

The economist Robert Shiller suggested something similar, in his "home price futures market". But the word "futures" scares me... very un-BH, to say the least. One wonders: why hasn't this "market" enjoyed much traction? Is there a nasty catch?
That would require a base of stocks that solely held ownership in owner-occupied housing, which obviously is impossible as they then wouldn't be the owner-occupiers. And would still be broad, rather than aligned to changes in local property prices. REIT funds tend to more broadly cover the wider set, corporate, public storage units, hotels ...etc. etc. such as VNQ. Additionally there are products such as DRV (3x short) that might be held by those anticipating price declines

PV
DoctorE
Posts: 178
Joined: Thu Feb 13, 2014 2:11 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by DoctorE »

There is the REZ ETF however its performance is only slightly better than VNQ.
Really not sure why REITs haven't benefited from the uplift in US house prices the last 5Y... is it because of future interest rates outlook?
cjking
Posts: 2039
Joined: Mon Jun 30, 2008 4:30 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by cjking »

REITs have generally avoid residential property because it is not a business that can be done at scale. It requires local specialist knowledge and very hands-on management. This isn't my own theory, it's something I've read in various places, I don't remember where, possibly in "The Economist".

(I did read a few years ago about a company with a system that was able to overcome the limitations, so it's not always impossible, but I think this was "an exception that proves the rule." And actually I remember that even that company would only target a tiny proportion of properties that fitted a certain profile.)

To use an analogy, there aren't megacorps doing housing provision for the same reasons there aren't megacorps cutting hair or doing plumbing. These are all economic activities where smaller-scale operators will be more efficient than larger ones.
User avatar
hammockhiker
Posts: 137
Joined: Mon Oct 10, 2022 2:19 pm
Location: Georgia

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by hammockhiker »

cat_guy wrote: Thu Jun 01, 2023 9:18 pm
Wouldn't it be interesting to try to proxy the actual real estate market with a fund?
There's something like HOMZ. From the description it's a "... rules-based index composed of 100 companies that collectively represent the performance of the U.S. residential housing industry." It's a very small ETF.

I don't own it and am not particularly interested in doing so, but it sort of ticks the boxes you listed. In the top ten holdings it looks like it owns Lowes and Home Depot plus a lot of home builders like D.R. Horton and such. I haven't dug any deeper to see which, if any, REITs it owns, so it may be more construction-based than rent-based so far as the housing market.
Moderation in all things, including moderation.
crefwatch
Posts: 2500
Joined: Sun Apr 15, 2007 1:07 pm
Location: New Jersey, USA
Contact:

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by crefwatch »

I'd suggest that REITs are a poor way to proxy the real estate market because they are dynamically (public auction) priced at all trading times. That's not true of either residential or commercial real estate "properties." Regular REITS are sharply affected by general economic conditions, Fed announcements, and consumer sentiment, "today". Mortgage REITs are highly sensitive to interest rate movements and general credit conditions. You are asking for a product that cannot be "built" out of REITs.
Leesbro63
Posts: 10634
Joined: Mon Nov 08, 2010 3:36 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Leesbro63 »

I’ve had the Vanguard REIT index since the late 1990’s. This real estate investment was a great diversifier in my favor during the tech crash of 2000ish. This year it is a great diversifier against me. 🤷🏻‍♂️
Valuethinker
Posts: 49020
Joined: Fri May 11, 2007 11:07 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Valuethinker »

cjking wrote: Fri Jun 02, 2023 3:53 am REITs have generally avoid residential property because it is not a business that can be done at scale. It requires local specialist knowledge and very hands-on management. This isn't my own theory, it's something I've read in various places, I don't remember where, possibly in "The Economist".

(I did read a few years ago about a company with a system that was able to overcome the limitations, so it's not always impossible, but I think this was "an exception that proves the rule." And actually I remember that even that company would only target a tiny proportion of properties that fitted a certain profile.)

To use an analogy, there aren't megacorps doing housing provision for the same reasons there aren't megacorps cutting hair or doing plumbing. These are all economic activities where smaller-scale operators will be more efficient than larger ones.
After the 2008 Crash you could pick up a Single Family Home in places like Arizona or California for less than the cost of construction.

Blackstone and a couple of other professional REIT managers did so.

They have now floated those vehicles and they are US-listed. The returns on portfolios of a few thousand homes. Good money has been made in them. It's hard to see why they would outperform real estate markets generally in the future. The undervaluation that was present in 2009+ just isn't there now. The easy money has been made.

Sam Zell, who just died, was a real estate titan. Traditionally there have been multifamily REITs, because apartment buildings have clear economies of scale in management (collecting rent, doing maintenance etc). He said he didn't think this would prove to be true of SFH - although the relevant funds argue the contrary for SFHs.

There was also that Fintech business which was buying and then reselling undervalued homes. It turned out in doing so they were bidding up their own prices - the algorithm was killing them. They had to terminate that activity quite suddenly due to losses.
toddthebod
Posts: 5735
Joined: Wed May 18, 2022 12:42 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by toddthebod »

unwitting_gulag wrote: Fri Jun 02, 2023 1:14 am
Marseille07 wrote: Thu Jun 01, 2023 10:32 pm What do you get out of single-family homes? Landlording them is possible but not as profitable as multi-family, so your ROI won't be as good.
I'd personally like a financial-vehicle that allows me to profit from appreciation in America's owner-occupied single family houses, without actually owning any houses, or being a landlord, or having anything to do with multi-family dwellings.
Well, since you can't invest in a private asset, you need a proxy. iShares ITB invests in home construction companies. You could also invest in banks that specialize in mortgages.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by JoMoney »

I just noted this in a different thread, but it probably applies here as well. It's an important distinction to understand that the general stock market has many, many, many companies/stocks that own massive amounts of real estate and do quite a bit of real estate operations, but are not "REITs".
A REIT is a specific form of incorporation that has impacts with how the money is taxed and distributed to the shareholders at a corporate level. There is plenty of real estate exposure in the general stock market that is not incorporated as a REIT.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Valuethinker
Posts: 49020
Joined: Fri May 11, 2007 11:07 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Valuethinker »

crefwatch wrote: Fri Jun 02, 2023 8:17 am I'd suggest that REITs are a poor way to proxy the real estate market because they are dynamically (public auction) priced at all trading times. That's not true of either residential or commercial real estate "properties." Regular REITS are sharply affected by general economic conditions, Fed announcements, and consumer sentiment, "today". Mortgage REITs are highly sensitive to interest rate movements and general credit conditions. You are asking for a product that cannot be "built" out of REITs.
I believe the empirical evidence is that the value of properties in unquoted funds tracks stock market valuations that are applied to REITs, but with a lag.

Main difference is the private assets & benchmark indices have different proportions of different types of real estate, than the public market REITs.

We have debated this many times with respect to the TIAA RE Annuity, and David Swensen covers it in his books.

There's no "money on the table" there by eschewing a REIT index fund in favour of some private partnership of the type institutions frequently invest with. There's just a time lag which the quoted market takes into account in valuing the shares.

There was a Blackrock fund that was invested in real estate assets directly, and they have had to gate it (prevent redemptions). As interest rates rose, there were redemptions, and they ran out of liquid assets to fund those redemptions. A quoted REIT would simply have moved to a bigger discount to NAV.
User avatar
Tamarind
Posts: 2810
Joined: Mon Nov 02, 2015 1:38 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Tamarind »

How about VMBSX, Vanguard's index fund for mortgage-backed securities?

In theory this is the most direct way to invest in residential housing since a huge fraction of homes are mortgaged and pass through one of the corporations that issue the securities this bond fund holds.... In practice it's just another proxy for mortgage interest rates, which you can see from the recent performance.

IMO the idea that housing increases in value non-speculatively is mostly an artifact of the post-WW2 economy & policy which combined to make the debt required to build and maintain an otherwise depreciating asset much cheaper. The 30-year fixed rate mortgage is a historical anomaly, as is the restrictive zoning which drives a lot of the appreciation in "hot" markets. Without those two things, a house is a place you live which is constantly trying to fall apart.
Valuethinker
Posts: 49020
Joined: Fri May 11, 2007 11:07 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Valuethinker »

Tamarind wrote: Fri Jun 02, 2023 8:47 am How about VMBSX, Vanguard's index fund for mortgage-backed securities?

In theory this is the most direct way to invest in residential housing since a huge fraction of homes are mortgaged and pass through one of the corporations that issue the securities this bond fund holds.... In practice it's just another proxy for mortgage interest rates, which you can see from the recent performance.

IMO the idea that housing increases in value non-speculatively is mostly an artifact of the post-WW2 economy & policy which combined to make the debt required to build and maintain an otherwise depreciating asset much cheaper. The 30-year fixed rate mortgage is a historical anomaly, as is the restrictive zoning which drives a lot of the appreciation in "hot" markets. Without those two things, a house is a place you live which is constantly trying to fall apart.
There is, as yet, very little tangible sign that restrictive zoning will be abolished?

Even in California, which has passed a law to that effect, my understanding is there are still plenty of ways for people to fight off having new neighbours. We all want to move to paradise, and then freeze it in place and time.

30 year fixed rate is US government policy. Hard to see them unpicking that. But other countries without that (Canada, Australia, UK) have still had housing price increases up there with some of the top US metropolitan markets.

I agree about the physical depreciation of houses. A house with 1970s/80s decor will sell for a substantial discount to a newly renovated home. And when houses need exterior maintenance it can really cost.

A related factor is the cost of insurance & property taxes. These also seem to rise faster than inflation over the long run. California market quite distorted by Proposition 13 provisions which "freeze" low ratepayers in place (as I understand the situation).

Mortage REITs have not enjoyed good performance over the long run. I think David Swensen, among others, recommends avoiding them.
v42
Posts: 56
Joined: Sun Nov 06, 2022 12:51 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by v42 »

unwitting_gulag wrote: Fri Jun 02, 2023 1:14 am
I'd personally like a financial-vehicle that allows me to profit from appreciation in America's owner-occupied single family houses, without actually owning any houses, or being a landlord, or having anything to do with multi-family dwellings.

...

The economist Robert Shiller suggested something similar, in his "home price futures market". But the word "futures" scares me... very un-BH, to say the least. One wonders: why hasn't this "market" enjoyed much traction? Is there a nasty catch?
The only financial vehicle that achieves exactly this is indeed the CME Housing Index Futures, which are based on the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index. Indeed "un-BH"-like, but they are pretty to easy trade via Interactive Brokers. One goes long to benefit from appreciation (or short to hedge against decline) for a given date at the current market-expected index value. If the actual Case-Shiller Index comes in higher (or lower) at that time, one makes (or loses) $250 per point difference in each contract; at the current index levels (~300 points), this means that each contract is equivalent to roughly a $75,000 investment in the average metro-area single-family home. Since the index is itself created out of repeat sales data, it measures average price appreciation across the market, and does not require repeated appraisals of the same properties. There are also specialized products for 10 metro city-specific indexes.

The two "catch"es here are: (1) the futures market already has some appreciation baked in, so you only benefit with long contracts if the appreciation is higher than market expectations. For example, the Feb 2028 contract is quoted at 330 today, which means you will only benefit if cumulative appreciation until then is over ~9% from the most recent index value (302.3). You can't get in at today's spot price with this product as you can do by just going and buying real houses. (2) the market is thinly traded, so the bid/ask spreads are decently high. That said, it allows for massive leverage (unlike buying real houses you don't need to put the $75000 down or pay mortgage interest to get that amount of price exposure), but that kind of leverage is indeed scary and very un-BH-like.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Marseille07 »

unwitting_gulag wrote: Fri Jun 02, 2023 1:14 am I'd personally like a financial-vehicle that allows me to profit from appreciation in America's owner-occupied single family houses, without actually owning any houses, or being a landlord, or having anything to do with multi-family dwellings.

The appeal would be akin to that of an index fund. If I happen to live in East Bumble, and over in East Bumble we have minimal property-value appreciation because we're in the Rust Belt, our job market soured in the 1980s, and never really recovered, well, by investing in this "index fund", I can benefit from housing market gains in Seattle, Rayleigh, Sarasota FL, Los Angeles and so on. There is diversification benefit - if a few local markets founder, others still thrive. There's the enormous benefit of avoiding concentration risk. If one particular house ends up being lemon, requiring a complete redo of the foundation, or something similarly catastrophic - OK, doesn't matter, because slices of millions of other houses in the index spread the risk around.

The economist Robert Shiller suggested something similar, in his "home price futures market". But the word "futures" scares me... very un-BH, to say the least. One wonders: why hasn't this "market" enjoyed much traction? Is there a nasty catch?
The nasty catch is that it's not lucrative for the owners. Let's say you're looking to buy a 1M house.

a) You put down 200K and take out an 800K mortgage. While you have to pay the mortgage, when the house reaches 2M you keep all of 2M.
b) You issue 10 shares at 100K/share, pay 200K for 2 shares (down payment) and sell the remaining 8 shares to the investors and buy the house all cash. While you now own the house without a mortgage, when the house reaches 2M, your share of home equity is only 400K and other investors walk away doubling their money.

Most people would rather choose a), especially if they're still working.
unwitting_gulag
Posts: 665
Joined: Mon Dec 05, 2016 3:37 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by unwitting_gulag »

seajay wrote: Fri Jun 02, 2023 2:46 am That would require a base of stocks that solely held ownership in owner-occupied housing, which obviously is impossible as they then wouldn't be the owner-occupiers. ...
Lots of good responses (the above, and others) to my query about a paper-asset that tracks owner-occupied SFH not being feasible. Just as we can invest in public companies using the stock market (individual stocks, funds, indices, ETFs,...) but need some "private" vehicle to invest in privately-held companies, so to - or rather, even more so - it doesn't appear to be possible to "securitize" privately held real estate. Loans, yes. Construction companies, yes. Rents, also yes. But regrettably, I can't go door-to-door with a suitcase of cash, offering homeowners to buy 1% of their house, for cash on the spot... let alone, get a mortgage to leverage such an action.

The lesson is twofold: to really benefit from SFH real estate appreciation - again, not the rents, but the capital gains, one has to (1) own the house directly, and (2) do so in an area that itself is (and will continue to be) economically vibrant. If I'm a goat-herder in Ethiopia, I can buy all of the Vanguard index funds that I like. But to participate in the American residential housing boom, I'm going to have to buy an American residential house.
Topic Author
cat_guy
Posts: 199
Joined: Sun Mar 08, 2020 1:45 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by cat_guy »

Wow, so much good info! I realized something after my original post. I seem to half forget every once in a while that real estate itself is not an appreciating asset. Here's actual price per square foot:

Image
source: https://www.supermoney.com/inflation-ad ... me-prices/

The only way to try to make money by holding real estate is to buy strategically, which takes effort, risk, and de-diversification, which I don't want to do.

So, to simulate "owning real estate" in one's portfolio, ibonds and TIPS do the job.

I think rephrasing my original question a bit, what I want to do is: "emulate being a residential and commercial and industrial landlord, including both leasing and buying/selling/flipping, in the same proportions that there is residential and commercial landlord revenue in the market".

Why do I want to do this? Because real estate leasing revenue is part of the global market in a proportion that is not represented by buying a total market fund (right?) which is the same reason many folks add a REIT fund to their portfolio (right?) even though VTI and friends already hold REITS.

So, I have the same goal as folks who add an extra REIT fund is to better capture the global market, I just want to go a step further and capture it in more accurate proportions.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by 000 »

cat_guy wrote: Fri Jun 02, 2023 10:21 pm I think rephrasing my original question a bit, what I want to do is: "emulate being a residential and commercial and industrial landlord, including both leasing and buying/selling/flipping,
Publicly traded REITs do just that. As do private REITs sold by brokers, platforms like Fundrise, etc.
in the same proportions that there is residential and commercial landlord revenue in the market".
There are many publicly traded REITs in apartments and commercial areas. The problem starts with trying to match the value of SFHs and farmland via public REITs in a diversified way. As far as I know, there are only 2 of each kind. It seems that in order to match the proportions, one must either accept the idiosyncratic manager risk of using these to match the total value of this kind of real estate, try to add in some risk management with put options, try to do something with futures, or use non-publicly-traded real estate investments.
So, I have the same goal as folks who add an extra REIT fund is to better capture the global market, I just want to go a step further and capture it in more accurate proportions.
If one owns a home, one already has lots of exposure. If own lives in an apartment, might apartment stocks be a better match for future rent increases?
Leesbro63
Posts: 10634
Joined: Mon Nov 08, 2010 3:36 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Leesbro63 »

000 wrote: Fri Jun 02, 2023 10:56 pm
cat_guy wrote: Fri Jun 02, 2023 10:21 pm I think rephrasing my original question a bit, what I want to do is: "emulate being a residential and commercial and industrial landlord, including both leasing and buying/selling/flipping,
Publicly traded REITs do just that. As do private REITs sold by brokers, platforms like Fundrise, etc.
in the same proportions that there is residential and commercial landlord revenue in the market".
There are many publicly traded REITs in apartments and commercial areas. The problem starts with trying to match the value of SFHs and farmland via public REITs in a diversified way. As far as I know, there are only 2 of each kind. It seems that in order to match the proportions, one must either accept the idiosyncratic manager risk of using these to match the total value of this kind of real estate, try to add in some risk management with put options, try to do something with futures, or use non-publicly-traded real estate investments.
So, I have the same goal as folks who add an extra REIT fund is to better capture the global market, I just want to go a step further and capture it in more accurate proportions.
If one owns a home, one already has lots of exposure. If own lives in an apartment, might apartment stocks be a better match for future rent increases?
How well does the Vanguard REIT Index fund emulate?
Jack56
Posts: 149
Joined: Thu Jun 30, 2016 3:27 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Jack56 »

There are lots of REITs out there that just do residential if that is where you want to be but returns on residential contrary to popular belief tend to be low - low risk, low return.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by 000 »

Leesbro63 wrote: Sat Jun 03, 2023 7:03 am How well does the Vanguard REIT Index fund emulate?
VNQ has 4.90% in Single Family Residential REITs.
StrangePenguin
Posts: 293
Joined: Tue Mar 27, 2018 11:35 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by StrangePenguin »

Marseille07 wrote: Fri Jun 02, 2023 9:53 am
unwitting_gulag wrote: Fri Jun 02, 2023 1:14 am I'd personally like a financial-vehicle that allows me to profit from appreciation in America's owner-occupied single family houses, without actually owning any houses, or being a landlord, or having anything to do with multi-family dwellings.

The appeal would be akin to that of an index fund. If I happen to live in East Bumble, and over in East Bumble we have minimal property-value appreciation because we're in the Rust Belt, our job market soured in the 1980s, and never really recovered, well, by investing in this "index fund", I can benefit from housing market gains in Seattle, Rayleigh, Sarasota FL, Los Angeles and so on. There is diversification benefit - if a few local markets founder, others still thrive. There's the enormous benefit of avoiding concentration risk. If one particular house ends up being lemon, requiring a complete redo of the foundation, or something similarly catastrophic - OK, doesn't matter, because slices of millions of other houses in the index spread the risk around.

The economist Robert Shiller suggested something similar, in his "home price futures market". But the word "futures" scares me... very un-BH, to say the least. One wonders: why hasn't this "market" enjoyed much traction? Is there a nasty catch?
The nasty catch is that it's not lucrative for the owners. Let's say you're looking to buy a 1M house.

a) You put down 200K and take out an 800K mortgage. While you have to pay the mortgage, when the house reaches 2M you keep all of 2M.
b) You issue 10 shares at 100K/share, pay 200K for 2 shares (down payment) and sell the remaining 8 shares to the investors and buy the house all cash. While you now own the house without a mortgage, when the house reaches 2M, your share of home equity is only 400K and other investors walk away doubling their money.

Most people would rather choose a), especially if they're still working.
Is it true that most people would choose (a) in the scenario laid out above? Yes, you forgo the chance to make as much money in the long term if your house appreciates a lot. But you also get to immediately have $0 mandatory monthly payments towards housing (aside from insurance, taxes, maintenance). In the abstract this scenario actually sounds very attractive to me.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Marseille07 »

StrangePenguin wrote: Sat Jun 03, 2023 5:36 pm Is it true that most people would choose (a) in the scenario laid out above? Yes, you forgo the chance to make as much money in the long term if your house appreciates a lot. But you also get to immediately have $0 mandatory monthly payments towards housing (aside from insurance, taxes, maintenance). In the abstract this scenario actually sounds very attractive to me.
I think b) would be somewhat viable if you could somehow make it term-based, like after 5 years you redeem the note no matter what, and no early redemptions. It'd be like bonds, except that you don't make coupon payments; the value is tied to the property.

I don't think it's practical to securitize and make them tradable on the open market every weekday.
unwitting_gulag
Posts: 665
Joined: Mon Dec 05, 2016 3:37 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by unwitting_gulag »

StrangePenguin wrote: Sat Jun 03, 2023 5:36 pm
Marseille07 wrote: Fri Jun 02, 2023 9:53 am...Let's say you're looking to buy a 1M house.

a) You put down 200K and take out an 800K mortgage. While you have to pay the mortgage, when the house reaches 2M you keep all of 2M.
b) You issue 10 shares at 100K/share, pay 200K for 2 shares (down payment) and sell the remaining 8 shares to the investors and buy the house all cash. While you now own the house without a mortgage, when the house reaches 2M, your share of home equity is only 400K and other investors walk away doubling their money.

Most people would rather choose a), especially if they're still working.
Is it true that most people would choose (a) in the scenario laid out above? Yes, you forgo the chance to make as much money in the long term if your house appreciates a lot. But you also get to immediately have $0 mandatory monthly payments towards housing (aside from insurance, taxes, maintenance). In the abstract this scenario actually sounds very attractive to me.
What "most people would choose" is... unclear. But for me personally, the main qualm is concentration-risk. Just as I'd be leery of putting anything more than play-money into just one stock (hence, index funds), I worry about concentrating too much, by buying one house. What if the house is a lemon? What if the neighborhood declines? What if the local market becomes moribund?

If we think about it, isn't it a bit shocking, that in what's often presented as the largest investment that "most people" (not necessarily Bogleheads) will make, they are by definition concentrated? I'd much rather own 1% of 100 different houses, in different parts of the country (or indeed, the world). I suppose that a sufficiently wealthy person could own 100 houses, but unless those houses sit empty - a waste, no? - the owner becomes a landlord... which is beside the point.

Wouldn't it be nice, if we could form cohorts of owners, resembling a mutual fund? Say, 100 people get together, each owning 1% of each other's houses. Then we can spread the risk around!
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Marseille07 »

unwitting_gulag wrote: Sat Jun 03, 2023 8:25 pm Wouldn't it be nice, if we could form cohorts of owners, resembling a mutual fund? Say, 100 people get together, each owning 1% of each other's houses. Then we can spread the risk around!
I'm not sure why you want this. What if some owners are careless and burn their homes down, and your mutual fund loses value?

Also, if 100 people are in the same city then you aren't really spreading the risk, as the local RE market goes up and down in tandem.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by 000 »

unwitting_gulag wrote: Sat Jun 03, 2023 8:25 pm Wouldn't it be nice, if we could form cohorts of owners, resembling a mutual fund? Say, 100 people get together, each owning 1% of each other's houses. Then we can spread the risk around!
Even if lenders/regulators would allow it, there would appear to be some major principal-agent problems here. Or is tragedy of the commons the better metaphor? Or would it really be an adverse selection problem? :D

Anyway, the person living in the house of which they own 1% is not meaningfully differently incentivized than a renter with regards to property upkeep. So there would need to be substantial oversight with real means to ensure maintenance compliance. It would be like renting from an HOA. :twisted:

If one could offer a kind of mortgage that is entitled to a percentage of the future house sale proceeds, those would (after being payed off) turn into a fairly liquid real estate price linked instrument as the remaining value would be from the house sale at an undetermined date in the future.
Topic Author
cat_guy
Posts: 199
Joined: Sun Mar 08, 2020 1:45 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by cat_guy »

The only reason to invest in a diversified portfolio of real estate ownership, without getting the leasing revenue, is to emulate the behavior of the overall real estate market, which is the same as i bonds or TIPS.

De-risking home ownership is a catch-22 because we the owners are the risk factor for a property being expensive to maintain. of course this means making dozens of good decisions per year. that's the cost/burden of home ownership and the benefit of renting. I'm amazed that "monthly labor and worry" is still not included in the rent/buy calculators. Just a few hours a month and we start to see the overall cost level out. IMO the only reason to ever buy a house is because you want that house, want to be able to modify it, etc. - the net cost is always a wash and/or too complicated to truly quantify.

Back to my original topic: does anyone have a suggestion for where to get data on proportion of residential, commercial, and industrial real estate revenue in the public+private market?
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by JBTX »

To have a publicly traded security the security maker owns the underlying assets. Most homes are owned by homeowners. There may be a few companies that have SFU rental portfolios.

Owning a home and just letting it sit there would not be a long term positive yielding investment. It grows a little more than inflation but has carrying costs such as property taxes, maintenance, utilities etc.

An investment bank firm could in theory try to make some derivative to try to follow some housing index, but again you usually have to have assets to back up the security, otherwise the security writer is taking naked unhedgeable risk, something that contributed to the 2008 bust.
unwitting_gulag
Posts: 665
Joined: Mon Dec 05, 2016 3:37 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by unwitting_gulag »

cat_guy wrote: Sun Jun 04, 2023 12:25 pm The only reason to invest in a diversified portfolio of real estate ownership, without getting the leasing revenue, is to emulate the behavior of the overall real estate market, which is the same as i bonds or TIPS.
How have I-bonds or TIPS performed since 2019, relative to the national Case-Shiller housing price index?
cat_guy wrote: Sun Jun 04, 2023 12:25 pmDe-risking home ownership is a catch-22 because we the owners are the risk factor for a property being expensive to maintain. of course this means making dozens of good decisions per year. that's the cost/burden of home ownership and the benefit of renting. I'm amazed that "monthly labor and worry" is still not included in the rent/buy calculators.
One supposes that one of the premises of this Forum, is that many of us would rather not run a business ourselves, instead preferring to passively invest in an index of publicly-traded companies. Thereby we benefit from much of the dynamism of American business, while outsourcing the actual work of running the business, to competent professionals. Sometimes these professionals are woefully incompetent. This is de-risked by investing in a broad set of companies, in hope that most are after all, run by competent people.

Why not apply the same thinking to real estate? A huge risk in real-estate is choosing the "right" house, by which I mean something that is properly built, properly sited and so on... a house that isn't a lemon. It's akin to choosing the "right" stock. If I admit that my stock-picking skill is lacking, why should I still believe that my house-picking skill is somehow adequate? Then comes your point, about maintenance burdens. This is why I'd rather rent... but note how much property values have been rising! How to take advantage of that, while still remaining a renter? This is where the index-concept would ideally come in.

Bottom line - admitting that my dream is fanciful.... Wall Street and brokerage firms such as Vanguard have democratized ownerships of businesses, where Joe Public can buy into an index fund or ETF. But home ownership hasn't been similarly democratized. Am I crazy for thinking that this is an odd asymmetry?
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by 000 »

There is much more variance in individual stock returns than individual home returns, especially if one is limited to a certain region for other reasons.
Lynx310650
Posts: 403
Joined: Fri Sep 15, 2017 1:33 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by Lynx310650 »

Isn't Arrived basically what OP is looking for? I know there are several comparable companies now as well.
Topic Author
cat_guy
Posts: 199
Joined: Sun Mar 08, 2020 1:45 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by cat_guy »

Lynx310650 wrote: Sun Jun 04, 2023 5:35 pm Isn't Arrived basically what OP is looking for? I know there are several comparable companies now as well.
existing residential REITs / REIT funds are sufficient to achieve what I want, which is to invest in the market-ratio of residential/commercial/industrial, but I don't know what that ratio is, and I'm also curious why this isn't a more sought after approach.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by 000 »

cat_guy wrote: Sun Jun 04, 2023 7:59 pm existing residential REITs / REIT funds are sufficient to achieve what I want, which is to invest in the market-ratio of residential/commercial/industrial, but I don't know what that ratio is, and I'm also curious why this isn't a more sought after approach.
You mean like these links I found doing web searches?

https://www.savills.com/impacts/market- ... state.html

https://www.zillow.com/research/us-hous ... 021-30615/

https://www.reit.com/data-research/rese ... -market-us

https://www.statista.com/statistics/196 ... ince-2004/
Topic Author
cat_guy
Posts: 199
Joined: Sun Mar 08, 2020 1:45 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by cat_guy »

cat_guy wrote: Sun Jun 04, 2023 8:22 pm i believe these are all discussing the value of the assets and not the net earnings over time
Which makes me realize, perhaps it's difficult/impossible to find a good analog to market cap of publicly traded companies for privately held real estate operations.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by 000 »

cat_guy wrote: Sun Jun 04, 2023 8:22 pm i believe these are all discussing the value of the assets and not the net earnings over time
Value of the assets is the equivalent of stock market cap.

Stock holdings in funds like VTI, VOO are weighted by the current market price of the stock * the number of shares, not anything with earnings.
Topic Author
cat_guy
Posts: 199
Joined: Sun Mar 08, 2020 1:45 pm

Re: Why are no REIT funds attempting to proxy the real estate market?

Post by cat_guy »

000 wrote: Sun Jun 04, 2023 9:18 pm Value of the assets is the equivalent of stock market cap.

Stock holdings in funds like VTI, VOO are weighted by the current market price of the stock * the number of shares, not anything with earnings.
yes but, the market price of the stock is determined by the buyers and sellers in the market, not by the assets held by the company, so i think it's quite a bit different.
Post Reply