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Equity REITs outperformed unlisted real estate investments over a more than two-decade period, delivering higher returns for pension funds, according to research released Monday.

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REITs outperformed private real estate by nearly 2.7 percentage points per year on average, and also provided better risk adjusted returns.

The new study, which was sponsored by Nareit and conducted by research firm CEM Benchmarking, had access to a 21-year data set (1998 – 2018). It analyzed the allocation and performance of assets in more than 200 public and private sector pensions with nearly $3.9 trillion in combined assets under management.

“CEM Benchmarking’s study shows the striking disparities between the returns of REITs and unlisted real estate,” Nareit’s Executive Vice President of Research and Investor Outreach John Worth said in a statement.

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.

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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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