REITs have convincingly outperformed private equity real estate funds in head-to-head matchups over a 20-year sample period from the first quarter of 2000 to the fourth quarter of 2019, according to Tom Arnold, a visiting scholar at the University of Florida’s Warrington College of Business.
Speaking with the REIT Report, Arnold highlighted the results of new research, sponsored by Nareit, that he carried out with fellow academics David Ling and Andy Naranjo at the University of Florida.
Arnold explained that one of the main takeaways from the research is that even with no risk adjustments, 53% of the time investors would have been better off in the REIT index during the period that the private equity real estate fund was investing. The mean out-performance was 165 basis points, or 1.65 percentage points, per year. With a conservative investment for relative risk, REITs outperformed nearly 70% of the time, and their outperformance grew from 165 basis points per year to almost 600 basis points per year.
Arnold comments on how investors can use this information most effectively, including whether they are being compensated for incremental risk, as well as why pension funds allocate the way they do and what impact this new research might have on that.
Arnold said there is a perception that with leverage, pension funds can generate cashflow that would be more than a dividend yield from the public market and that there would be less diversification benefit from investing in the public markets, relative to private real estate. “But our research suggests this is not the case,” he concludes.