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Blending Listed and Private Real Estate Protects Downside
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Blending Listed and Private Real Estate Protects Downside

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Some investors think the only way to protect against losses in commercial real estate investing is to give up returns by investing in private real estate funds following a core (conservative) …

Some investors think the only way to protect against losses in commercial real estate investing is to give up returns by investing in private real estate funds following a core (conservative) strategy. The truth is just the opposite: core funds often lose money for years at a time. Over the 36-plus-year history of the NCREIF Open-End Diversified Core Equity (ODCE) Index, there have been 128 complete five-year periods, and the average net return on core funds has been negative during 30 of them (23.8%). And even when positive periods are included, net total returns on core funds have averaged just 7.5% per year.
Over the same period, net total returns on listed U.S. equity REIT portfolios have averaged about 12.2% per year, and net returns have been negative during just 7 five-year periods (5.5%).
But portfolios that combined equal allocations to both listed U.S. equity REITs and private core funds would have shown negative net returns during only three five-year periods, all of them including the 2008-2009 liquidity crisis. Combining listed and private core real estate has tended to protect real estate portfolios from losses.

Published in: Real Estate
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  • 1. Public REITs and Core Real Estate Funds are Complements in a Total Real Estate Allocation 100% ODCE, 0% REITs 50% REITs, 50% ODCE 0% ODCE, 100% REITs 23% 44% 33% 0% 2% Five-Year Net Returns 48% 50% 0% 5% 36% 41% 17% 60% 50% 40% 30% 20% 10% 0% <0 0 - 10% 10% - 20% 20%+ Percent of 5-Year Investment Periods Avg. Annualized Return • REITs and core funds have similar, but not identical, long-term investment characteristics creating diversification within the asset class when combined • This diversification creates the opportunity for the blended portfolio to earn higher returns while reducing the potential for negative or low returns • Since 1977 there have been only three five-year investment periods during which a 50/50 private / public portfolio experienced negative net returns (2004Q1-2009Q1, 2006Q3- 2011Q3, and Source: 2006Q4-NAREIT® and 2011Q4). NCREIF (70% NPI – 30% FTSE NAREIT Equity REIT Index, 1978 – September 2008) Note: Based on quarterly net total returns of FTSE NAREIT All Equity REITs Index and NCREIF Open-End Diversified Core Equity (ODCE) Index, 1978Q1-2014Q3. Source: NAREIT analysis of data from NCREIF and IDP accessed through FactSet. 0

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