  Real Estate Investment Trusts (REITs) are the only truly liquid assets
related to real estate investments. We study the behavior of U.S. REITs over
the past three decades and document their return characteristics. REITs have
somewhat less market risk than equity; their betas against a broad market index
average about .65. Decomposing their covariances into principal components
reveals several strong factors. REIT characteristics differ to some extent from
those of the S&P/Case-Shiller (SCS) residential real estate indexes. This is
partly attributable to methods of index construction. Our examination of REITs
suggests that investment in real estate is far more risky than what might be
inferred from the widely-followed SCS series. REITs, unlike SCS series are
forward looking, and this helps them in the prediction of SCS returns. REIT
forecasts of SCS returns are reasonably precise over a number of periods.
