Morningstar: REITs Deliver Return Premium Over Private Equity Real Estate Funds

A new Morningstar research study introduced this week shows publicly traded REITs have provided a significant investment return premium compared to private equity real estate funds over a range of holding periods, including over the last full real estate cycle.

According to the analysis, which is based on 20 years of actual performance data, publicly traded REITs have outperformed core, value-added, and opportunistic private equity real estate funds over the long term, have experienced stronger bull markets, and have recovered faster from downturns. In addition to the noteworthy performance comparison, the research also highlights the public market attributes of REITs that benefit an investment portfolio "“ increased liquidity, transparency, and lower fees and expenses on average.

Morningstar found, for the 20-year period 1989 to 2009, REITs delivered compound annual net total returns of 9.3 percent compared to 4.4 percent for private equity core funds, 3.7 percent for value-added funds and 6.1 percent for opportunistic funds. During the same period, publicly traded REIT fees and expenses averaged one-half to one-fourth of the fees and expenses charged by private equity real estate funds. And, over the course of the last full real estate cycle, REITs produced a cumulative net total return of 801 percent, or 13.4 percent on an annualized basis, higher than the performance of core funds (272 percent, or 7.6 percent annualized), value added funds (320 percent, or 8.5 percent annualized) and opportunistic funds (617 percent, or 12.0 percent annualized).

As of Sept. 30, 2010, REITs also operated with less leverage than value-added and opportunistic funds. As the Morningstar report noted, higher leverage can mean more volatility that isn't compensated by higher returns. Core funds had the lowest leverage, but also the lowest returns over the full real estate cycle.

"These findings support the case for pension funds and other institutional investors having larger allocations to publicly traded equity REITs in their real estate portfolios than they typically do today," said NAREIT Executive Vice President of Research and Investor Outreach Michael Grupe. He noted the IREI/Kingsley Associates 2011 survey of public pension funds and other institutions showed these investors plan to commit 92.6 percent of their real estate allocations this year to private forms of debt and equity, including 72.67 percent to private equity real estate funds, but only 7.4 percent to publicly traded REITs.

"The research underscores the strength of the REIT business model in delivering sustainable returns and the need to have a well balanced allocation between REITs and private equity in real estate portfolios as institutional investors seek to both increase portfolio returns and manage risk," Grupe said.

The full Morningstar research report, entitled "Commercial Real Estate Investment: REITs and Private Equity Real Estate Funds," along with a video discussing the study can be found at