REITs Outperform Unlisted Real Estate Investments Over 21 Years: Study

Key Findings

CEM compared returns, correlations and volatilities of four key private real estate ownership styles with varying risk profiles and costs — internally managed direct, value added/opportunistic, core funds and funds of funds — and concluded that REITs outperformed private real estate irrespective of ownership style.

At the same time, the analysis showed that REITs had the lowest allocation of any asset in the study. Over the 21-year period, pension funds' allocations to REITs were flat, while those for private real estate increased, especially value-add/opportunistic funds.

In 2018, REITs accounted for 0.8% of total pension assets, compared with 5.2% of assets invested in private real estate.

According to the study, listed equity REITs had an average annual net return at 10.2% over the 21-year period, second only to private equity among the 12 asset classes covered.

REIT and unlisted real estate returns were highly correlated when illiquid returns were adjusted for reporting lags, measuring as 0.84. Nareit noted that the high correlation was not surprising given the similarities in underlying assets.

REIT and unlisted real estate returns had relatively low correlations with bonds and listed equity returns, reflecting the diversification benefits associated with the real estate asset class, whether REITs or unlisted real estate, according to Nareit.

Using the Sharpe ratio, the analysis indicated that REITs had the highest non-fixed income risk adjusted return, 0.41, a reflection of their high returns and just above average volatility. In comparison, unlisted real estate had a Sharpe ratio of 0.30, reflecting lower returns and volatility comparable to REITs.

The data also indicated that REITs provided better risk-adjusted returns than any style of private real estate.

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