- October 1, 2018: Vol. 5, Number 9

Private vs. public real estate: Not all real estate is created equal, and new structures have made private real estate more accessible to individual investors

by Black Creek Group

Institutional investors have historically benefited by investing in privately owned commercial real estate. Compared with publicly traded real estate, these benefits may include superior income returns, diversification and strong overall risk-adjusted returns. Owning private commercial real estate means investing in individual properties or through a pooled investment vehicle that is open to individual investors but is not listed on a stock exchange.

Because private real estate is not publicly traded, it is not subject to the stock market volatility responsible for much of the fluctuation in the share prices of publicly owned real estate. Private real estate investments do not provide the ready liquidity of public real estate.

In recent years, new investor-friendly structures with greater transparency and enhanced liquidity features have made investment in private real estate more accessible to individual investors. Compared with a portfolio that included only public real estate, a portfolio inclusive of private real estate has historically generated better risk-adjusted returns in addition to adding the potential for income and diversification.

The NCREIF Open-End Diversified Core Index reported net of management and advisory fees is a commonly used measure of private real estate, and is the index used in this report to represent private real estate. Although funds used in this index have characteristics that differ from net asset value REITs, which include differing management fees, this is an appropriate and accepted index for the purpose of evaluating returns on investments in NAV REITs.

Over the past 20 years, the income return of private real estate has exceeded the income return of public real estate. Private real estate’s 6.6 percent income return represents more than 70 percent of its total return, an attractive feature to investors who want a balanced mix of growth and income.

Public real estate returns have correlated with stock market returns more closely over time than private real estate returns, potentially making private real estate a more effective portfolio diversifier. From 2008–2017, 79 percent of public real estate returns were correlated to S&P 500 returns, up from a correlation of about 31 percent over the previous decade. Meanwhile, private real estate correlated only to 15 percent to 19 percent of S&P 500 returns over the past two decades, underscoring the diversification benefit of investing in private real estate when compared with public real estate.

Thanks in part to private real estate’s lower volatility, it has also produced stronger risk-adjusted returns — as defined by a higher Sharpe ratio — than public real estate over the past 20 years. (A Sharpe ratio is one of the standard tools financial professionals use to compare investments, and represents the risk premium an asset generates relative to the volatility of its returns, where a higher figure indicates a better return relative to the riskiness of the investment.) In the past 20 years, private real estate has generated risk-adjusted returns that are about 2.5 times better than public real estate returns.

Excerpted from the Black Creek Group report Not all real estate is created equal. For the full research report visit


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