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Executive Summary. Long present in the United States, real estate investment trusts (REITs) are a fairly new phenomenon in Europe. This paper examines the sensitivity of European REIT returns to returns in other asset classes, including equities, bonds, and commodities. Consistent with previous studies, the results suggest that a significant positive correlation is observed between REITs and equities, especially small cap- and value stocks; REIT correlation to fixed income securities is found negative. Temporal variations in asset volatilities and their effect on correlations are assessed: The motivation is for investors and portfolio managers alike to incorporate the time-varying nature of the relationship in their decision making. Whereas the diversification benefits for equities decrease with increasing volatility, fixed income assets provide an increased hedge. The case of commodities in this sense remains to a large extent blurred.
Niskanen et al. (Fri,) studied this question.