Public and Private Real Estate: The Sum is Greater than the Parts

The main advantages of publicly traded GRES are large and diverse part of the real estate universe, attractive long-term returns, improved risk-adjusted returns, enhanced diversification within real estate allocation, and additional advantages including better access to certain property types / strategies as well as potential investment strategies for institutional investors that combine public and private approaches.

Report highlights

• Publicly traded global real estate securities (GRES) and global private real estate (both direct investments and indirect vehicles such as funds) are very large wealth sectors, with estimated institutional market sizes of $4.5 trillion and $5.1 trillion, respectively.
• Both approaches offer a large universe of potential investments, strong historical and potential future performance, diversification benefits vis-a-vis equities and fixed income, and a range of risk / return strategies. Long-term returns are similar, but enough differences exist so that each can add value to an institutional real estate portfolio.
• Institutional investors, particularly large ones, tend to favor private / direct real estate over publicly traded GRES due to concerns about public market volatility. While publicly traded GRES are more volatile than private real estate over short time frames, over longer measurement periods (e.g. five years), public and private real estate returns and volatility are similar, with medium to high correlations.
• Although more volatile in the short term compared to appraisal based private real estate indices, GRES offer superior liquidity and lower transaction costs.
• By overweighting private real estate, institutional investors may be missing out on advantages that publicly traded GRES can provide. GRES offer access to many established and specialty sectors with high-quality assets and best in class operators, such as regional malls, residential, self-storage, data centers and cell towers that are difficult to own privately in various parts of the world. GRES generally generate higher dividends than cash distributions from private real estate vehicles with similar risk and leverage.
• Publicly traded GRES and private real estate are complementary in that a combination of the two approaches is likely to generate higher risk adjusted returns than either approach on its own.
• There are numerous ways for institutional investors to take advantage of the complementary relationship between public and private real estate. GRES can account for a meaningful portion of a core real estate allocation – both domestic and non-domestic, particularly for small and medium size institutions. For larger institutions, GRES provides an efficient way to access non-domestic real estate as well as flexibility in managing exposure and risk across cycles.

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