How does the risk of investing in the real estate sector compare to the broader market?
While the risk of investing in the real estate sector varies by segment, this sector generally carries greater risk than the broader market. The real estate sector's volatility makes it popular among growth investors who shoulder greater risks in exchange for higher return potential. Many investors with exposure to the real estate sector mitigate the associated risk by investing in noncyclical or counter-cyclical sectors, both of which perform better than average during down markets when real estate and other highly cyclical sectors perform the worst.
The Real Estate Sector
Three segments compose the real estate sector. The largest, real estate operations and services, deals with the operations side of real estate, including financing, insurance and maintenance. This segment carries a beta of 1.3, which indicates it is 30% more volatile than the broader market.
The second real estate segment is development. Large contracting companies and other firms involved in real estate development make up this segment, which, with a beta of 1.02, is the least volatile of the three. The segment tracks closely with the broader market, exhibiting only 2% greater volatility.
General and diversified real estate, a segment composed of real estate companies that do not fit into the above categories, is the smallest segment in the sector. It is also the most volatile, carrying a beta of 1.82. This tiny segment is attractive to growth investors as it beats the market by 82% when times are good.
Conservative investors, those who eschew risk, look to real estate investment trusts, or REITs. A REIT offers much more stability than traditional real estate. It has its own sector, which carries a beta of 0.79, making it 21% less volatile than the broader market.