REIT - July/August 2010

The remaining 3. 5 percent would be allocated to publicly traded REITs.

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 equity funds.

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