How do REITs perform compared to other alternative and traditional assets?

In October, CEM Benchmarking compiled a study for the National Association of Real Estate Investment Trusts (NAREIT).

The study is called “Asset Allocation and Fund Performance of Defined Benefit Pension Funds in the United States, 1998-2017.”

It examines how pension managers have allocated their cash over the 20 year period. It also explores what delivered the highest returns. CEM Benchmarking also examined volatility and the correlation between asset classes during that time period.

The study explored 12 asset classes, including private equity REITs, hedge funds, and traditional stocks and bonds.

Breakdown of the CEM Benchmarking Study

Since NAREIT commissioned the study, one would expect the results to favor REITs.

And they do.

Private equity was the highest returning asset and listed REITs came in a close second after fees. REITs outperformed U.S. and Foreign stocks regardless of market capitalization. They also crushed the returns from various segments of the bond markets.

They also achieved this with less volatility than stock portfolios.

Given this information where would you expect (hope) most pension managers allocated their capital?

If you answered REITs, you would be conceptually right and factually wrong.

CEM Benchmarking found that, “Although they had the second-highest arithmetic average annual net return of 10.9 percent and the second-highest compound average annual net return of 9.3 percent over the period, listed equity REITs were the least used asset class covered in the study. Allocations to listed equity REITs averaged just 0.6 percent of total assets. Unlisted real estate, by contrast, had a 3.7 percent allocation on average while having had an arithmetic average annual net return of 8.1 percent and a compound average annual net return of 6.9 percent.”

Other Measures of Outperformance

REITs also outperformed non-listed real estate funds over the 10-year period.

Although they own essentially the same asset class it appears that the fees and costs of the listed funds were a drag on performance. The study found that “All styles of unlisted real estate underperform listed equity REITs by between 1-3 percent depending on style, primarily driven by differences in investment fees.”

You can download a copy of the report here.

By: Tim Melvin

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