Key Takeaways
- • REITs outperformed closed-end private equity real estate funds by 165 basis points annually (seasoned PERE funds) and 186 basis points annually (economic life funds) over a 20-year period from Q1 2000 through Q4 2019, according to research authored by University of Florida Professor David Ling and co-authors Thomas R. Arnold and Andy Naranjo.
- • Long-term performance analysis covering a full real estate cycle demonstrates public REIT superiority, with listed REITs outperforming private equity real estate funds across both bull market and complete cycle periods, challenging conventional wisdom in the institutional real estate allocation debate.
- • Fee structures, cash drag, and delayed loss recognition in private equity funds erode returns despite their perceived smoothness, suggesting investors pay a structural cost for opacity that narrows the performance gap on a net-of-fees basis.
- • University of Florida real estate research director recommends increased REIT portfolio allocation, with Professor Ling stating the evidence "suggests that you should have at least some allocation of your portfolio to public REITs, and perhaps a larger allocation than you had before."
- • Research methodology distinguished between seasoned funds (4+ years old) and economic life funds (vintage 2014 or earlier with stable IRRs) to ensure comparable performance analysis across different fund maturity stages and reporting periods.
Summary
A comprehensive 20-year performance study has settled a longstanding debate in institutional real estate investment: publicly traded REITs significantly outperform closed-end private equity real estate (PERE) funds on both average returns and individual fund success rates. The research, titled "Private Equity Real Estate Fund Performance: A comparison to REITs and Open-End Core Funds," analyzed performance data from Q1 2000 through Q4 2019 and found that listed REITs outperformed seasoned PERE funds by 165 basis points annually and economic life PERE funds by 186 basis points annually.
The research examined two distinct fund categories to ensure methodological rigor: "seasoned" PERE funds with at least four years of operating history, and "economic" funds with vintage years of 2014 or earlier and stable IRR reporting. This approach controlled for maturity and reporting consistency, strengthening the validity of the findings across different fund development stages. The performance differential held across the full real estate cycle and during bull market periods specifically, indicating sustained REIT superiority rather than cyclical outperformance.
The findings challenge conventional allocation strategies among institutional investors, particularly defined benefit pension plans and family offices that have historically weighted private equity real estate heavily. According to Nareit analysis, publicly traded REITs have outperformed private real estate by nearly 200 basis points in U.S. defined benefit pension plans specifically. The research attributes this gap partly to structural cost factors endemic to private equity vehicles: elevated management fees, cash drag from capital deployment delays, and the institutional tendency to recognize losses slowly in private fund reporting.
David Ling, Ken and Linda McGurn Chair and Director of the Nathan S. Collier Master in Science of Real Estate program at the University of Florida, led the research alongside co-authors Thomas R. Arnold and Andy Naranjo. Ling has stated the evidence "suggests that you should have at least some allocation of your portfolio to public REITs, and perhaps a larger allocation than you had before," signaling a potential shift in institutional real estate strategy. While prior studies have yielded mixed results depending on time periods and methodologies employed, this extended 20-year analysis across a complete real estate cycle provides institutional investors with substantial empirical support for rebalancing toward public market exposure in real estate allocations.
The research examined two distinct fund categories to ensure methodological rigor: "seasoned" PERE funds with at least four years of operating history, and "economic" funds with vintage years of 2014 or earlier and stable IRR reporting. This approach controlled for maturity and reporting consistency, strengthening the validity of the findings across different fund development stages. The performance differential held across the full real estate cycle and during bull market periods specifically, indicating sustained REIT superiority rather than cyclical outperformance.
The findings challenge conventional allocation strategies among institutional investors, particularly defined benefit pension plans and family offices that have historically weighted private equity real estate heavily. According to Nareit analysis, publicly traded REITs have outperformed private real estate by nearly 200 basis points in U.S. defined benefit pension plans specifically. The research attributes this gap partly to structural cost factors endemic to private equity vehicles: elevated management fees, cash drag from capital deployment delays, and the institutional tendency to recognize losses slowly in private fund reporting.
David Ling, Ken and Linda McGurn Chair and Director of the Nathan S. Collier Master in Science of Real Estate program at the University of Florida, led the research alongside co-authors Thomas R. Arnold and Andy Naranjo. Ling has stated the evidence "suggests that you should have at least some allocation of your portfolio to public REITs, and perhaps a larger allocation than you had before," signaling a potential shift in institutional real estate strategy. While prior studies have yielded mixed results depending on time periods and methodologies employed, this extended 20-year analysis across a complete real estate cycle provides institutional investors with substantial empirical support for rebalancing toward public market exposure in real estate allocations.
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