Real estate investment trusts beat private real estate funds in both the short and long term, according to a recent study.
Over the past 30 years, REITs outperformed private funds by an average of 487 basis points per year, says a report published in early fall by Cohen & Steers, a New York-based money-management firm. REITs, which like private funds invest in such properties as office buildings, malls and hotels but are traded on stock markets, also beat the private funds by anywhere from 245 basis points per year to 1,159 bps on a 1-year, 2-year, 5-year, 10-year, and 20-year basis, according to the study, entitled The Truth About Real Estate Allocations: Evaluating Risk and Return.
The findings, based on an analysis of widely followed indices maintained by the National Association of Real Estate Investment Trusts and the National Council of Real Estate Investment Fiduciaries, should change the minds of institutions that historically have been big investors in private real estate, the authors contend. We posit that although institutional investors tend to invest in private real estate funds and assume they work better than investing in REITs, data dont bear this out, says Jon Cheigh, senior vice president and portfolio manager at Cohen & Steers.
Cheigh says many institutional investors believe that private funds are safer out of ignorance. Investors dont hear about ups and downs every day, he notes.
Private investments are valued based on appraisals of the property, which not only are imprecise but may also be out of date, since theyre undertaken no more frequently than quarterly, Cheigh explains. If the economy is getting worse, worse, worse, private real estate wont reflect the bad news all in one quarterreal estate funds are artificially smooth, he says.
Aside from superior returns, REITs biggest benefit is liquidity, which Cheigh says should be prized by more institutions. If youre an endowment and you want to build a new library but the donations didnt come in the way youd thought, then you go to your REIT manager and youd have instant liquidity, he says. If you go to your real estate fund manager, the manager would say, Well, I dont have that. You own a bucket of properties and theyre not available right away.
REITS also have lower fees than private funds, whose managers Cheigh says may therefore have a conflict of interest. Sme may be motivated by fees rather than performance, he notes.
REITS third advantage, says Cheigh, is lower leverage, at least compared with real estate funds managed by private equity firms. Theyre far less debt-driven than are most private equity real estate funds, he insists.