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Executive Summary. This study examines the sensitivity of equity real estate investment trust (REIT) returns to returns on other asset classes, including real estate, using an estimation method that explicitly allows for variation over time in the sensitivities. The results show that the relationship between REIT returns and returns to bonds, small cap stocks, large cap stocks and unsecuritized real estate has changed over time. During the 1990s, REITs began to exhibit a direct link to real estate returns, indicating that REITs do provide portfolios with some exposure to the real estate asset class. The strength of this link, however, is cyclical in nature. The sensitivity of REIT returns to large cap stocks has declined through time. REIT returns exhibit a sensitivity to small cap returns that has a strong cyclical component, with the two becoming more closely linked in REIT market downturns.
Clayton et al. (Mon,) studied this question.