Institutional investors have largely steered clear of real estate investment trusts in recent years, but they may be doing so to their detriment, new research shows.
LaSalle Investment Management, the $58 billion real estate investment manager, found that institutional investors still favor private real estate funds over their public counterparts in part because of their perception that private funds have lower volatility, according to research that will be released next week. REITs, which are publicly traded, fluctuate in price all the time, while the value of properties in private funds is based on periodic appraisals.
In favoring private real estate investments, however, investors may be leaving returns on the table. LaSalle found that portfolios that mixed publicly traded real estate securities with private funds had better long-term returns than simply holding one or the other.
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According to LaSalle, which offers both private and public real estate, public funds offer more diverse approaches to real estate investing, including more options focused on emerging economies and countries and companies with real estate development businesses. At the same time, REITs also offer exposure to certain industries, such as cell towers, data centers, health care and self-storage, that are harder to access through private funds.
In 2007, global institutional investors had about 15 percent of their real estate allocation in REITs but that was before an index of equity real estate investment trusts lost almost 50 percent in 2008. By 2012, that allocation dropped to 5.4 percent, according to research gathered by LaSalle for Institutional Investor. In 2016, institutional investors were a little more confident, bumping up their allocations to 7 percent of their real estate allocations.
Steve Ralff, managing director and head of product development for LaSalle Investment Management Securities, explains that while the overall allocation to REITs may be lower than it was ten years ago, many institutional investors now see REITs as a perpetual holding, not just an opportunistic bet on a real estate sector from time to time.
Since 2008, REITs have lowered the amount of leverage they use, developed sophisticated financing options, brought in stronger management teams, and have narrowed their focus to specialties, such as multi-family or industrial properties, he says.