How Smart is the Real Estate Smart Beta? Evidence from Optimal Style Factor Strategies for REITs

Dimos Andronoudis, Massimo Guidolin and Manuela Pedio

No 25241, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: This paper is the first to introduce and evaluate factor-based (“smart beta”) investment strategies in real estate, using Real Estate Investment Trusts (REITs)—the real estate counterpart to stocks. Drawing from equity pricing research, we construct five factor portfolios: Size, Value, Investment, Profitability, and Momentum, and examine their performance over the period from January 1993 to December 2020. Our findings provide empirical strong support for Value, Size and Momentum. On the contrary, the premiums associated to Investment and Profitability are highly time varying. We develop smart beta strategies that combine the REIT market portfolio with the factor portfolios to enhance asset allocation. The results demonstrate that these strategies consistently generate superior risk-adjusted returns compared to a passive buy-and-hold approach in the NAREIT index. Furthermore, our findings indicate that REIT-based smart beta strategies can compete with—and, in some instances, exceed—the performance of diversified cross-asset portfolios.

Keywords: real estate factors; REITs; factor investing; smart beta strategies (search for similar items in EconPapers)
JEL-codes: G11 G12 R30 (search for similar items in EconPapers)
Pages: 36
Date: 2025
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