Winning the Race – A New Look at Investing in Public and Private Real Estate

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Institutional participation in the real estate asset class has grown significantly over the past five years, with Preqin reporting alternatives, singling out over 7,600 entities with real estate distribution in 2020, representing an increase of more than 30%.

One of the fastest growing styles of real estate investing is the closed-end private equity fund, which offers investors easier implementation of investment strategies than direct investment in real estate and, according to many investors, higher returns than investments in listed companies. real estate securities due to the illiquidity premium, which is considered a characteristic of non-tradable investments.

However, we provide evidence in the recently completed research this may prompt investors to rethink the validity of the illiquidity premium. The study compares the performance of private real estate investment funds to listed real estate investment funds sponsored by Nareit.

Earlier academic studies have explored this issue as well. However, unlike these earlier studies, most of which compared the performance of private market benchmarks with the performance of REIT indices over time periods, our study uses a “leap” methodology to compare the actual internal rates of return of individual private funds to investment. concentrated in the United States, against the background of the FTSE EPRA / Nareit US Net Total Return index for the investment period of each private fund.

Our research includes the results of 375 jumps between specific closed-end real estate funds and the REIT index over different time periods from 2000 to 2014. Fund performance varies over time, and this methodology allows us to better understand the distribution of fund performance over time – something that a single private market benchmark, consisting of an unknown mixture of funds of different vintages, cannot do. This gives us a clearer picture of whether real estate private equity or REITs were the best over our sample period.

After collecting baseline data for all the races, we found that REITs outperformed real estate private equity funds in 53% of direct comparisons and outperformed private equity funds averages by 165 basis points.

We believe there are other factors to consider when making a meaningful comparison of the relative performance of private equity funds and REITs. Compared to a REIT, the typical private real estate investment fund is significantly less liquid, uses more financial leverage, and requires limited investors to retain liquid assets in dry powder form for future capital requirements.

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