The remaining 3. 5 percent would be allocated to publicly
Many large investors embraced commercial real estate as a
distinct asset class at least 20 years before publicly traded REITs
provided a large, liquid and transparent public market alternative to direct real estate investments. Thus, it is not surprising
that today many of these same investors still execute the bulk of
their real estate allocations using direct investments and private
However, more recently available data with respect to private
equity real estate funds now provide institutional investors the
opportunity to compare more rigorously the reported performance of publicly traded REITs with that of private equity funds
and to critically re-evaluate how they balance their total real
estate allocations using both private equity real estate funds and
publicly traded real estate securities.
What the Performance Record Reveals
A NAREIT analysis released in May compares investment
performance over the last full real estate cycle, from peak to peak,
which lasted approximately 17-½ years. Because real estate investment typically involves some amount of leverage, which enhances
equity returns during periods of rising valuations, the analysis also
focused on the bull market period, from trough to peak.
The analysis reveals that REITs delivered higher returns, net
of fees and expenses, than private equity real estate funds using
core, value-added or opportunistic strategies.
The analysis compares data from the F TSE NAREIT Equity
REIT Index with data published by the National Council of Real
Estate Investment Fiduciaries (NCREIF) and The Townsend
Group. The NCREIF-Townsend Fund Indices reflect the performance of private equity real estate funds available to U.S. institutional investors. Unlike the Equity REIT Index, which is fully
transparent and includes all publicly traded REITs, the NCREIF-Townsend Fund Indices do not include all funds, and not all factors contributing to performance differences can be controlled.
Over the course of the full cycle, NAREIT’s analysis finds
that, net of fees and expenses, publicly traded REITs on average
delivered a cumulative total return of 801 percent, or 13. 4 percent
at a compound annual rate. Meanwhile, core funds on average had
a cumulative net total return of 272 percent ( 7. 7 percent annual
rate), value-added funds on average had a net total return of 318
percent ( 8. 6 percent annual rate) and opportunity funds on average
had a net total return of 621 percent ( 12. 1 percent annual rate).
Looking only over the course of the bull market, publicly traded
REITs on average delivered a cumulative net total return of 1,038
percent, whereas core funds and value-added funds on average
generated cumulative net total returns of 341 percent and 430 per-
cent, respectively. Opportunity funds on average had a cumulative
net total return of 963 percent during their bull market run.
Why Are REIT Returns Higher?
NAREIT’s findings raise an intriguing question: Which factors
could account for the higher investment returns on average from
REITs over these periods?
Liquidity: Publicly traded REITs trade on efficient,
transparent and forward-looking exchanges. REIT share prices,
therefore, tend to lead reported private equity valuations and to
have more immediate and appreciably shorter downturns. Liquidity may add a measure of volatility to asset pricing, but it also adds
a valuable dose of independent and more efficient price discovery.
transparency: As publicly traded companies, REITs
are required on an ongoing basis to prepare and make publicly
available detailed and standardized financial statements. Such
information is carefully monitored by shareholders, analysts and
investors to hold managers accountable for company performance.
Transparency also supports more accurate performance measurement. In liquid and public markets, transparency leads to more
Net Returns to Equity REITs and
Private Equity Real Estate Funds
7.7% / yr
10.4% / yr
12.2% / yr
18.4% / yr
15.9% / yr
8.6% / yr
12.1% / yr
13.4% / yr
1990q3 – 2007q4
1990q3 – 2008q2
1993q2 – 2008q2
1993q2 – 2007q4
1990q3 – 2007q1
1993q4 – 2007q4
1990q3 – 2007q4
1989q3 – 2007q1
Duration Returns Duration Returns
Bull Market Only
( Trough to Peak)
(Peak to Peak)
Source: NAREIT® analysis of data from NCREIF and the Townsend Group,
and FTSE NAREIT Equity REITs Index