Publications

Real Estate

REITs at head of the class

by Andrea Waitrovich

Listed equity REITs posted average annual net returns of 11.95 percent between 1998 and 2014, higher than 11 other assets included in a recent study conducted by CEM Benchmarking and sponsored by NAREIT.

The study examines fund performance and capital allocations for more than 200 public and private pension funds over the 17-year period. It compares gross and net average annual total returns as well as net compound returns across 12 asset classes: U.S. large-cap equity, U.S. small-cap equity, non-U.S. equity, U.S. long bonds, U.S. broad fixed income, U.S. other fixed income, non-U.S. fixed income, private equity, hedge funds/TAA, unlisted real estate, listed equity REITs and other real assets.

During the period, the highest-returning asset classes on an arithmetic net return basis were REITs, at 11.95 percent, followed by private equity (11.37 percent) and U.S. small-cap stocks (10.3 percent). On a compound net return basis, the best-performing asset class was also listed equity REITs, at 10.14 percent, followed by private equity (9.34 percent) and other real assets, which included commodities and infrastructure (8.34 percent).

The arithmetic net return of unlisted equity real estate was 8.59 percent, and the compound net return was 7.21 percent. The equity real estate returns are reported to CEM without leverage, while the REIT returns are with leverage.

Private equity had a higher average annual gross return than REITs at 13.46 percent; however, its net return was lower at 11.37 percent, pulled down by management fees that were nearly four times higher than those of REITs.

The study also compared volatilities and risk-adjusted returns using the Sharpe ratio across asset classes. Outside of fixed income, REITs had the highest Sharpe ratio, measuring 0.45, reflecting their high returns and average equity volatility. Unlisted real estate had a much lower Sharpe ratio measuring 0.32, reflecting the lower returns and comparable volatility to REITs.

After adjusting for valuation lags, the study found that REITs and unlisted real estate had comparable volatilities. REITs and unlisted real estate had the fourth and fifth most volatile net returns, with measured volatilities of 20.7 percent and 19.0 percent, respectively. As the study noted, the similarity in volatilities is not surprising, given listed equity REITs and unlisted real estate have the same underlying assets.

Glossary, videos, podcasts, research in the Resource Center

Forgot your username or password?