How to Arbitrage Real Estate

Investors can make money on the different ways public and private real estate are priced, Cohen and Steers argues.

Dhiraj Singh/ Bloomberg

Dhiraj Singh/ Bloomberg

In March and early April, investors in publicly traded real estate companies experienced a body blow as stock prices cratered. Meanwhile, investors in private real estate funds, which are valued only quarterly based on qualitative assessments, barely felt the downturn.

Investors can take advantage of the fundamental differences in the way that real estate investment trusts (REITs) and private real estate funds are priced to both make money and diversify their property portfolios. Given the discrepancy in prices right now, investors can also move from private funds, into sectors that have held up well during the global pandemic, according to new research from asset management firm Cohen and Steers.

“These differences [in pricing mechanism] can cause material short-term dislocations, especially in periods of heightened uncertainty,” according to the report.

It’s about the speed that events are reflected in prices.

REITs, like any public security, are priced in real time. At the depth of the economic shutdown in March and early April, REIT investors imagined doomsday scenarios as commercial property and hotels sat empty and analysts forecasted that individuals would be unable to make rent payments for the foreseeable future. The price of REITs fell in line with that outlook.

In contrast, private real estate funds use other valuation methods, including appraisals — which depend on property transactions. Back in March and April, no real estate was changing hands to inform these valuations. As a result, the net asset values of private portfolios didn’t reflect the carnage.


“We really do believe that over the long term, underlying fundamental drivers of real estate will be the biggest influences of total return. It’s about supply, demand, and credit, regardless of the investment wrapper. But over the short term, the public real estate market is going to be influenced by macro factors in the equity markets. And that’s the opportunity at this point in time,” said Laurel Durkay, portfolio manager for global and U.S. real estate securities portfolios, in an interview.

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Over the last 20 years, private and public real estate have diverged in underlying holdings. Private funds, with institutional investor bases, have invested heavily in office property and shopping malls — two of the hardest hit areas during the Covid-19 shutdown. Office property was once seen as the safest of havens by institutions.

In contrast, REITs have moved into non-traditional property, such as cell towers, data centers for cloud computing, and industrial facilities that have become e-commerce distribution hubs. Forty percent of the U.S. REIT market is represented by these three sectors alone, according to the report.

During the first half of 2020, the three sectors also generated positive returns. REITs also include medical research facilities, self-storage, and alternative housing, such as retirement communities and single-family rentals. Non-traditional real estate makes up sixty percent of the U.S. listed REIT index and about 30 percent of the global listed index.

Historically, investors have liked that the NAVs of private real estate funds didn’t experience day-to-day volatility. But many property funds have shut off redemptions, amid a lack of information about underlying prices, killing some of that allure.

“As we have witnessed in 2020, as with other downturns, this uncertainty can force many private fund managers to suspend redemptions and distributions. If a manager understates NAVs, sellers may not receive fair value for their investments. But if NAVs are priced too high, remaining investors could be diluted. The solution for many managers has been to simply close the gates,” according to the report.

A REIT may fall in value, but investors can buy and sell anytime.