Brazilian REITs: Are They an Opportunity for Diversification and Performance?

Abstract

We study the dynamic diversification benefits of Brazilian real estate investment trusts (BR-REITs) by analyzing their complex dynamic relationship with stock and government bond indices. We estimate the assets’ conditional variance–covariance matrix using a vector autoregressive multivariate dynamic conditional correlation GARCH model with Student’s t distribution (VAR-DCC_t MGARCH) and a global minimum variance portfolio. We find that BR-REITs provide strong risk-adjusted performance and persistent diversification benefits for Brazilian investors. Furthermore, these diversification benefits are not impacted by the market performance of stocks and bonds. Nevertheless, our results show that the BR-REITs’ conditional correlations with stocks and bonds are dynamic; thus, BR-REIT investors should employ dynamic investment strategies that account for time variation in REITs’ diversification benefits. Our results suggest that Brazilian investors, particularly long-term investors, would secure significant performance and diversification benefits, lowering their portfolios’ short-term volatility, by investing in BR-REITs.

Keywords:

• Brazilian REITs
• Asset Allocation
• Diversification
• Performance

Acknowledgments

Márcio R. Bernardo would like to thank the Brazilian institution CNPq (National Council for Scientific and Technological Development) for supporting his research.

Notes

1 NAREIT’s Global Real Estate Investment. https://www.reit.com/investing/global-real-estate-investment

2 B3’s REITs monthly bulletin. http://www.b3.com.br/pt_br/produtos-e-servicos/negociacao/renda-variavel/fundos-de-investimentos/fii/boletim-mensal/

3 CMN is the highest Brazilian monetary council with the ability to formulate monetary and credit policies. CMN’s objective is to preserve Brazilian monetary stability and promote economic and social development.

4 The Fisher hypothesis states that nominal interest rates equal the sum of real interest rates and expected inflation. Fama and Schwert (1977) extend the model by incorporating unexpected inflation.

5 A comprehensive overview of US-REITs can be found at https://www.reit.com/what-reit.

6 CVM is the Brazilian equivalent of the US SEC.

7 B3’s monthly bulletin can be accessed at http://www.b3.com.br/pt_br/produtos-e-servicos/negociacao/renda-variavel/fundos-de-investimentos/fii/boletim-mensal/.

8 ANBIMA is the Brazilian Financial and Capital Markets Association.

9 Volatility persistence is the sum of ARCH and GARCH effects ($\alpha +\beta$).

Additional information

Funding

Carlos Heitor Campani thanks the following Brazilian institutions for financial support of his research: Brasilprev Research Chair, ENS (Escola de Negócios e Seguros), CNPq (National Council for Scientific and Technological Development), FAPERJ (Fundação de Amparo à Pesquisa do Estado do Rio de Janeiro), and Quantum Finance (data provider).