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Despite large differences in the risk and return profiles of publicly traded REITs and private real estate funds, the risk-adjusted returns of these two real estate investment types tend to follow each other more closely, most notably during recessions.

Although both publicly traded REITs and private real estate funds follow the same investment thesis (invest in real estate by pooling investor capital), both fund types have historically provided different risk and return profiles to investors. To examine these differences, we will use the FTSE Nareit All REITs index (FNAR) as a proxy for publicly traded real estate funds and NCREIF Fund Index – Open End Diversified Core Equity index (ODCE) as a proxy for private real estate funds. The FNAR index tracks all publicly traded US REITS and the ODCE index tracks 38 open-end private commingled real estate funds. Looking at the since inception return and volatility (measured as yearly standard deviation of returns) of these two indices, we can clearly see that publicly traded REITs have historically experienced higher returns, while private real estate funds have shown lower volatility.

Sources: FTSE Russel, NECREIF, FRED.

This differential in risk and return profiles becomes more apparent when looking at the data over the past 10 years. Although both fund types invest in almost identical assets, the publicly traded equivalent tends to yield higher returns yet produce more volatility during a crisis than the ODCE.

Sources: FTSE Russel, NECREIF, FRED.

The exact reasons behind these discrepancies in risk and returns are a hotly debated topic with no clear discernable answer. However, we can find clues to these discrepancies if we examine how private and public real estate funds are valued. Private real estate funds are valued at net asset value (NAV), which equals the fair market value (FMV) of all the properties and other assets contained in the fund minus any debt or other liabilities the fund holds. In the ODCE index, the FMV of properties is determined by quarterly valuations conducted by either the fund’s internal staff or external appraisals. Methodologies to determine FMV are predominately based on the income generated from a property or a sales comparison approach, depending on the property type and the availability of sale comps. Publicly traded REITs, on the other hand, have value determined by the buying and selling of REIT shares on the market exchange, primarily the New York Stock Exchange or NASDAQ. The high liquidity of publicly traded REITs creates significant trading volume, which contributes to price volatility and exposes these funds to volatility not linked solely to the condition of the underlying properties. Private real estate funds, on the other hand, are much less liquid and have prices generally unaffected by investors’ redeeming out of the fund or investing into the fund. In most scenarios, the only factors that affect the returns of private real estate funds are changes to the underlying property conditions, changes to the real estate market rents and cap rates, and changes affecting the price of other assets and liabilities that the fund may hold. Although these factors enable private real estate funds to be less volatile than their publicly traded equivalents, private funds have missed out on the bolstered returns historically enjoyed by highly liquid and accessible investments that trade on public exchanges.

Although there are apparent discrepancies between the risk and return profiles of public and private real estate funds, the risk adjusted return of publicly traded REITs and private real estate fund have tracked more closely to each other than the risk and return measures. Using the Sharpe ratio as a proxy for risk adjusted returns and the 10yr treasury as the risk-free rate, we can see that, over time, the risk-adjusted returns of publicly traded REITs and private real estate funds trend closer to one another, especially during recessions.

Sources: FTSE Russel, NECREIF, FRED.

These trends in risk-adjusted returns suggest that despite the differences in how both funds are valued, the public market and private funds’ appraisers value real estate surprisingly similarly for a given level of risk, especially during recessions when there is heightened trading volume and private real estate funds are rethinking the market assumptions behind their valuations.


The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.


Brant Goodrich, CFA

Assistant Vice President, Acquisitions
Boyd Watterson Asset Management, LLC

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