Investors wondering about the wisdom of a long-term commitment to real estate investment trusts (REITs) might want to take note of a new report that shows those equities have outperformed unlisted real estate investments for at least the past 20 years.
The study was commissioned by Nareit and conducted by the CEM Benchmarking firm, which analyzed a 21-year data set to assess the allocation and performance of nearly $3.9 trillion in assets under management at more than 200 public and private sector pensions.
The researchers came up with an annual return for REITs of 10.2%, second only behind private equity in the 12 kinds of investment classes studied.
"On average, REIT annual returns are nearly 2.7 percentage points higher than private real estate," John Worth, the trade group's executive vice president of research and investor outreach, said in an Oct. 19 media brief about the report.
Nareit calls out to pension fund and institutional investors
Despite that performance, REITs have the lowest allocation of any of the 12 asset classes included in the study, and that allocation remained flat throughout the study period, accounting for 0.78% of total pension assets compared with 5.19% for private real estate in 2018, the report said.
"This 21-year study reaffirms that pension fund managers and institutional investors should continue to look to REITs as a key component of their real estate strategy," Worth said.
While Nareit's goal here is to attract more of the massive institutional and pension fund business to its membership of REITs, the findings are relevant to everyday REIT investors, too, especially those considering the stocks for a retirement or other long-term portfolio.
Looking at 12 asset classes, five ways to own real estate
The study compares gross and net average annual total returns as well as correlations and volatilities for 12 asset classes with appropriate adjustments for reporting lags associated with illiquid asset classes (unlisted real estate and private equity), Nareit says.
Those 12 asset classes are: U.S. large-cap stocks, U.S. small-cap stocks, non-U.S. stocks, hedge funds, private equity, U.S. broad fixed income, long-duration fixed income, U.S. other fixed income, non-U.S. fixed income, unlisted real estate, listed equity REITs, and other real assets.
Meanwhile, the five real estate ownership styles covered are listed equity REITs, internally managed (core), external LP (opportunistic), external direct (core), and external fund of fund (core/opportunistic.)
(You can download the complete, 19-page report here for more detailed explanations.)
The study found that REITs had the second-highest average annual return -- 10.2% -- among the asset classes, trailing only private equity.
The researchers also found that REITs outperformed private real estate when comparing returns, correlations, and volatilities of each of the real estate ownership styles, despite varying risks, profiles, and costs.
Correlations, diversification point to REITs' place in private portfolios, too
They also found that REIT performance has a high correlation with private real estate and that both have low correlation with bonds and other listed equity returns. The CEM Benchmarking researchers said that reflects the well-known diversification benefits that real estate -- either in REITs or unlisted -- offers investors.
"Our analysis finds that REITs consistently provide strong long-term returns and critically important diversification to millions of Americans who rely on these pensions for their retirement security," said Alex Beath, senior research analyst at Toronto-based CEM Benchmarking.
The same can be said of REITs' roles in individual investment strategies as well, it would seem, whether the goal is growth, income, or both.