REIT - May/June 2010

Net Returns to Listed Equity REITs and Private Real Estate
Investments, Early 1990s Trough to Recent Peak
Form of CRE Investment
Leverage

Property Values

0%

Open-Ended diversified Core Equity Funds (OdCE)

≈20%

Value-added Private Equity real Estate Funds

54%

Opportunistic Private Equity real Estate Funds

67%

Publicly Traded Equity rEITs
≈40%

Return

322%
10.1% / yr
341%
10.4% / yr
430%
12.2% / yr
964%
18.4% / yr
1,041%
15.9% / yr

Source: NAREIT® analysis of data from NCREIF (NPI, ODCE, Townsend Fund Indices) and FTSE NAREIT Equity REITs Index.

importantly, to the REIT business model and how it affects the way REITs manage their portfolios compared with private equity fund managers.

Look to REITs for the Long Term

REITs are companies that are in business for the long term. REIT managers buy assets because they will generate continuing income for shareholders. They sell assets to better allocate capital to improve ongoing long-term returns. This long-term thinking produces a selective, strategic approach to acquisitions and divestitures that can benefit from (rather than be captive to) market cycles.

In contrast, private equity
vehicles are funds that are in
business for a limited term.
They buy assets because inves-
tors have committed capital,
which must be invested as soon
as possible so that the investors
can begin to see returns and
the fund managers can begin
to earn fees. They sell assets to
return capital to investors at a
predetermined fund termination
date in the case of closed-end
funds, and to meet redemption
demands in the case of open-
end funds. Given their limited
life, funds also may be entering
and exiting the market at inop-
portune times. And, finally, the
fee structures of most private
vehicles impose significantly
higher costs that, over time,
erode the net returns ultimately
delivered to investors.

management were clearly seen in the 2005 to 2008 commercial real estate price run-up, when private funds were net buyers of properties while REITs were net sellers.

When it comes to real estate investing, the so-called illiquidity premium is a total myth. That is an important message— one that the NAREIT team is committed to communicating to both institutional and individual investors. I am sure this will be a hot topic at REITWeek 2010: NAREIT’s Investor Forum®.