REIT and Private Real Estate Performance: A Closer Look
October 12, 2021 | John Worth
Many investors seeking the benefits of portfolio diversification to reduce volatility, along with competitive, continuing total returns, are talking with their advisors about adding commercial real estate to their retirement portfolios. In some cases, they are seeking these benefits of commercial real estate investment through direct ownership of rental properties or limited partnership shares in private real estate funds. Increasingly, financial advisors are recommending REITs, as a low cost, liquid form of commercial real estate ownership. A recent survey of financial advisors found that 83 percent of financial advisors invest their clients in REITs, and the most frequently referenced attribute they cite is “portfolio diversification.” The study also showed that financial advisors understand the importance of meaningful REIT allocations—irrespective of the client’s age—from early career through retirement.
A recent analysis of the performance of real estate investments held by 200 of the largest U.S. pension funds with a combined $3.6 trillion in Americans’ retirement assets shows that these financial advisors are likely offering sound advice. The pension funds’ experience shows that REITs outperformed private real estate, including properties managed by external managers and funds.
The study, by the pension benchmarking firm CEM Benchmarking, was based on the realized, aggregate fund level performance of pension fund investments over a 22-year period, 1998–2019, representing the latest end-date for which data was available. One of the unique benefits of the dataset used in the study is that it provided measures of performance at the pension fund level net of the real estate managers’ fees. The CEM dataset allows adjustment for illiquid asset reporting lags at the individual pension fund level. Reporting lag is the delay between when an underlying asset changes value and when that change in value is reported to the pension fund or investor. Illiquid assets like unlisted real estate have reporting lags.
