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This chart shows beta and alpha (net of fees) for four types of real estate investment in the U.S. relative to an unlevered portfolio of core property investments (as measured by the NCREIF Property Index), calculated using quarterly net total returns data from NCREIF and from the FTSE NAREIT All Equity REITs Index.
For an institutional investor that already has a portfolio of unlevered core properties, adding investments in private equity real estate funds has provided no real estate portfolio diversification benefit regardless of whether the new funds follow a core, value-add, or opportunistic strategy. Beta > 1 means that real estate portfolio volatility increases when any of those strategies is added to an existing portfolio of unlevered core properties, because private equity funds simply increase portfolio leverage; meanwhile, alpha < 0 means that real estate portfolio returns decline on a risk-adjusted basis.
In contrast, adding listed equity REIT investments reduces real estate portfolio volatility and increases risk-adjusted portfolio returns, with beta = 0.62 and (annualized) alpha = +8.41%. Measured returns to private real estate investments lag behind listed REIT returns by 4-5 quarters, so combining listed REITs with a private portfolio creates a "temporal diversification" benefit.
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