Performance of Public and Private Real Estate: Bibliography

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Listed (public) equity REITs and private real estate investment managers seek the same results (income and capital appreciation) in the same asset markets (investment-quality commercial properties). Performance data starting in January 1972 for listed equity REITs and 1978Q1 for private real estate make it clear that listed equity REITs have generated superior results over most historical periods. This bibliography (with links) summarizes the findings of 19 studies including independent academic research as well as studies conducted or sponsored by industry organizations.

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Performance of Public and Private Real Estate: Bibliography

  1. 1. BIBLIOGRAPHY ON PERFORMANCE OF PRIVATE AND PUBLIC REAL ESTATE Anget al. *2013+: Andrew Ang, Bingxu Chen, William N. Goetzmann, and LudovicPhalippou, “Estimating Private Equity Returns from Limited Partner Cash Flows,” November 2013. A major drawback of private equity is the lack of transactions-based performance measures. This greatly hampers the use of optimal portfolio allocation, which requires information about the risk, return, and covariance of asset classes. … For example, the NCREIF real estate index has a volatility of only 5%, while our estimated volatility of private real estate funds is 19%, which is close to the volatility of publicly traded REITs. Most specifications show a negative alpha for real estate funds. Andonov, Eichholtz& Kok [2013]: AleksandarAndonov, Piet M.A. Eichholtz, and Nils Kok, “Value Added From Investment Managers in Private Markets? An Examination of Pension Fund Investments in Real Estate,” July 2013. The average gross return of pension funds in real estate is about 7 percent during the 1990-2009 period. REITs delivered a higher gross return (10.92 percent) as compared to direct real estate investments (6.70 percent). … Especially smaller pension funds do not seem to recognize that REITs represent an investment approach in real estate that is comparable to selecting external managers investing in direct real estate (and much better than fund-of-funds managers) but with substantially lower investment costs. Ling & Naranjo [2013]: David C. Ling and Andy Naranjo, “Returns and Information Transmission Dynamics in Public and Private Real Estate Markets,” June 2013. Unconditionally, we find that passive portfolios of U.S. office and retail REITs outperformed their private market benchmarks; in the multifamily and industrial markets higher cumulative returns are observed in the private market. In the aggregate, unlevered core REITs outperformed their private market benchmark by 23 basis points (annualized) over the 1994-2011 sample period. Cohen & Steers [2013]: Joseph Harvey and Jon Cheigh, “Revisiting The Truth About Real Estate Allocations,” June 2013. Our findings have been consistent, year after year: listed real estate continues to outperform nearly all forms of institutional private real estate funds, regardless of the time periods in the study. Fisher &Hartzell [2013]: Lynn M. Fisher and David J. Hartzell, “Real Estate Private Equity Performance: A New Look,” May 2013. On average real estate private equity funds did not outperform the alternative realestate indexes that we consider—on average alternative market equivalent is 0.9 or less over the
  2. 2. whole sample period. Especially striking is the fact that on average, real estate private equity rarely out-performed REITs, and for some vintages the underperformance was substantial. Alcock, Baum, Colley & Steiner [2013]: Jamie Alcock, Andrew Baum, Nicholas Colley, and Eva Steiner, “The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds,” Journal of Portfolio Management special real estate issue, 2013. We find evidence for systematic underperformance (by private equity real estate investment funds) measured by Jensen’s alpha, which may potentially be related to the impact of transaction costs, fees and other market frictions. Further, we establish evidence that leverage cannot be viewed as a long-term strategy to enhance performance. In the short term, managers do not seem to add significantly to fund excess returns by timing leverage choices to the expected market environment. Shilling &Wurtzebach [2012]: James D. Shilling and Charles H. Wurtebach, “Is Value-Added and Opportunistic Real Estate Investment Beneficial? If So, Why?,” Journal of Real Estate Research 34(4):429-461, October-December 2012. Value-added and opportunity funds generally charge higher fees in return for providing a range of ‘value-added’ services. Yet it would appear that the high returns on value-added and opportunistic private equity real estate investments are due to the use of cheap debt. However, leverage is not an inherent property characteristic, but a financial tool and any property can be made risky by applying high leverage. Cheng, Lin & Liu [2012]: Ping Cheng, Zhenguo Lin, and Yingchun Liu, “Performance of Thinly-Traded Assets: A Case in Real Estate,” July 2012. The lack of appropriate performance tools for thinly-traded assets has caused a decades-old ‘real estate risk premium puzzle,’ which suggests real estate is a far superior asset than common stocks in terms of risk-adjusted returns. … We develop a new performance measure for private real estate assets by incorporating both liquidity risk and horizon-dependence of its returns. … We find that the long-standing ‘real estate risk premium puzzle’ appears to be an illusion caused by the conventional risk metric. Urban Land Institute [2012]: Andrew Baum, Jane Fear, and Nick Colley, “Have Property Funds Performed?,” ULI Europe, 2012. Core funds on average under-performed the market by -0.72% per annum, which can be partly explained by the impact of leverage. … Value-added and opportunity funds were found to have delivered higher returns during a rising market (2001-2006) but significantly under-performed core funds during the period of poor market returns (2007-2011). … On average fund managers neither add nor destroy value and it is the use of debt that has driven the significant levels of under-performance.
  3. 3. Farrelly&Matysiak [2012]: Kieran Farrelly and George Matysiak, “Performance Drivers of UK Unlisted Property Funds,” 2012. The results show the asymmetric impacts of financial leverage upon unlisted property fund performance. In positive market conditions an additional 10% of financial leverage has produced a 0.25% increase in quarterly fund total returns. However, this relationship changes dramatically when market returns are negative with an additional 10% of financial leverage leading to an approximate 0.9% decrease in quarterly fund returns in negative market conditions. … The results have clear implications for investors in private property fund vehicles which employ gearing and how they should assess the attendant risks. Morningstar *2011+: Morningstar, “Commercial Real Estate Investment: REITs and Private Equity Real Estate Funds,” September 2011. Publicly traded equity REITs have outperformed core, value-added, and opportunistic funds consistently over the long term, experienced stronger bull markets, recovered faster from downturns, and had lower fees and expenses on average compared with private equity real estate funds. Hoorenman& van der Spek [2011]: Maarten R. van der Spekandand Chris Hoorenman, “Leverage: Please Use Responsibly,” Journal of Real Estate Portfolio Management 17(2):75-88, May-August 2011. Before the crisis, the general belief was that higher leverage would result in a higher IRR. The findings reveal that the added value of leverage for core funds is highly overestimated. Although some leverage will improve the return, using more than 40% is likely to have a negative impact on the investor’s IRR. Urban Land Institute [2010]: Andrew Baum, Jane Fear, and Nick Colley, “Have Property Funds Performed?,” ULI Europe, February 2011. This research concludes that real estate funds in general have not delivered the required risk/return characteristics that investors would have expected or are led to believe. … If they are regarded as absolute 5-8% return funds, core funds have failed to meet these requirements, producing a time-weighted rate of return of only 2.5%. … The study found highly significant levels of high betas (around 3) evident in the opportunity fund returns, which were driven primarily by the market and leverage at the cost of significant risk to the investor. There is a clear danger that performance fees charged by managers can reward risk-taking (high beta) rather than manager skill (alpha). MacKinnon *2011+: Greg MacKinnon, “Do REITs Have an Advantage When Credit is Tight?,” Journal of Real Estate Portfolio Management 17(1):15-25, January-April 2011. A lack of capital means reduced competition in the bidding for available properties, including distressed properties coming to market. … If REITs are able to bid on properties at a time of decreased competition, and at a time when owners of property may be forced into distressed
  4. 4. sales because of their own capital constraints, then REITs may obtain properties at advantageous prices and thereby create value for shareholders. … With access to the public markets, REITs have a built-in advantage in times of constrained credit through the ability to raise capital via seasoned equity or unsecured bond issues. A seasoned equity offering can be arranged and capital raised in very little time to take advantage of market conditions. The evidence indicates that the markets do perceive REITs to have an advantage during periods when credit is considered tight. Cohen & Steers [2010]: Joseph Harvey, “The Truth About Real Estate Allocations,” June 2010. Actively managed REIT investors realized the highest returns for the 5-, 10- and 15-year periods. For the 15-year period, they earned an annualized 10.6%. Of the other active strategies, opportunistic funds placed second, at 9.8%. Core and value added funds lagged significantly, with annualized returns of 6.5% and 5.6%, respectively, over 15 years. NAREIT [2010]: Brad Case, “REITs: Real Estate with a Return Premium,” May 2010. Over their full cycles, and net of fees and expenses, REITs delivered a total return of 801 percent, or 13.4 percent at a compound annual rate, significantly outpacing core funds at 272 percent, or a 7.7 percent annual rate; value-added funds at 318 percent or a 8.6 percent annual rate; and opportunity funds at 621 percent or a 12.1 percent annual rate. Tsai [2007]: Jengbin Patrick Tsai, “A Successive Effort on Performance Comparison Between Public and Private Real Estate Equity Investment,” September 2007. At the all-sector level, the difference in mean returns between the REIT index and NPI is found to be 2.66% after return restatement. Riddioughy, Moriarty &Yeatman [2005]: Timothy J. Riddiough, Mark Moriarty, and P.J. Yeatman, “Privately Versus Publicly Held Asset Investment Performance,” Real Estate Economics 13(1):121-146, March 2005. Annualized NCREIF index returns over the entire sample period (were) 7.36%, compared to an adjusted annualized return of 10.44% for the REIT index. Pagliari, Scherer &Monopoli [2005]: Joseph L. Pagliari, Kevin A. Scherer, and Richard T. Monopoli, “Public Versus Private Real Estate Equities: A More Refined, Long-Term Comparison,” Real Estate Economics 13(1):147-187, March 2005. The data indicate that REITs outperformed private-market real estate by approximately 3.0% per annum.

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