Study Finds REITs Outperform Unlisted Real Estate Investments

New research indicates that REITs outperformed private real estate by nearly 2.7 percentage points per year on average and provided better risk-adjusted returns over 21 years. 

The study looked at the allocation and performance of assets in more than 200 public and private sector pensions with nearly $3.9 trillion in combined assets under management.

CEM Benchmarking conducted the research and Nareit, which is a Washington, DC-based association representing equity real estate investment trusts, mortgage REITs, REITs traded on major stock exchanges, public non-listed REITs and private REITs, sponsored the analysis.

REITs had the lowest allocation of other asset classes in the study. Over the 21 years, pension funds allocations to REITs were flat while allocations for private real estate, especially value-add and opportunistic funds, increased.  In 2018, REITs accounted for 0.78% of total pension assets compared with 5.19% of assets invested in private real estate.

Despite their low allocation numbers, REITs only trailed private equity in average annual returns of the 12 asset classes covered. Over the 21-year period covered by the study, listed equity REITs posted the second-highest average annual net return at 10.2%.

REIT performance had a low correlation with equities but was correlated with private real estate. Both REITs and unlisted real estate returns are highly correlated. These relatively low correlations reflect the diversification benefits associated with the real estate asset class, whether REITs or unlisted real estate, according to Nareit.

The study compared risk-adjusted returns using the Sharpe ratio. REITs had the highest non-fixed income Sharpe ratio of .41, which reflects their high returns and just above average volatility, according to Nareit. The data also indicated REITs provide better risk-adjusted returns than any style of private real estate.