Key Takeaways
- • REIT outperformance vs. private equity real estate (PERE): According to Nareit research, U.S. REIT returns exceeded PERE risk-adjusted returns by 590 basis points on average and won 68% of head-to-head matchups on a risk-adjusted basis; global funds showed similar results with 619 basis points of outperformance.
- • Liquidity and leverage advantages: Listed REITs offer substantially greater liquidity compared to closed-end private equity real estate funds and carry significantly lower leverage, reducing portfolio risk for retail and institutional investors.
- • Inflation hedge characteristics: REITs provide inflation protection through lease structures typically tied to inflation indices, supporting dividend growth and real income preservation during inflationary periods—a material consideration for 2021 portfolio construction.
- • ALPS Active REIT ETF (REIT) highlighted: The actively managed fund represents an accessible vehicle for smaller investors to achieve PERE-equivalent returns with the liquidity and transparency benefits of exchange-traded fund structure.
Summary
Academic research conducted by Nareit and a team of academic researchers and practitioners has documented a significant performance advantage for publicly traded REITs relative to private equity real estate funds when compared across matched investment horizons. In U.S. markets, REIT returns exceeded private equity real estate (PERE) risk-adjusted returns by 590 basis points on average, while winning 68% of direct head-to-head matchups on a risk-adjusted basis. Global REIT funds demonstrated comparable outperformance, delivering 619 basis points of excess risk-adjusted returns and capturing 68% of matchups against international PERE competitors.
Beyond raw performance metrics, REITs offer structural advantages that account for this performance gap. Closed-end private equity real estate funds lack the daily liquidity available to REIT shareholders and operate with substantially elevated leverage ratios. This combination creates both operational friction for capital deployment and elevated portfolio risk. Listed REITs, by contrast, trade on exchanges with minimal redemption friction and maintain more conservative capital structures, allowing investors to access real estate exposure without accepting the illiquidity and leverage profiles inherent to private equity structures.
The inflation-hedging properties of REITs merit particular attention for institutional allocators managing liability-driven portfolios. Most lease agreements in REIT portfolios contain inflation-indexed escalation clauses, creating a natural pass-through mechanism whereby rising price levels translate directly into higher lease income and property valuations. This structural feature supports sustainable dividend growth during inflationary environments and enables investors to maintain real purchasing power—a critical consideration in 2021's macroeconomic environment.
The ALPS Active REIT ETF (REIT) exemplifies this investment approach by providing actively managed real estate exposure through an exchange-traded fund wrapper. This structure combines the diversification and professional management of active real estate selection with the liquidity and tax efficiency characteristics of ETF architecture, positioning it as a viable alternative for investors seeking PERE-equivalent returns without accepting the operational and leverage constraints of traditional private equity real estate vehicles.
Beyond raw performance metrics, REITs offer structural advantages that account for this performance gap. Closed-end private equity real estate funds lack the daily liquidity available to REIT shareholders and operate with substantially elevated leverage ratios. This combination creates both operational friction for capital deployment and elevated portfolio risk. Listed REITs, by contrast, trade on exchanges with minimal redemption friction and maintain more conservative capital structures, allowing investors to access real estate exposure without accepting the illiquidity and leverage profiles inherent to private equity structures.
The inflation-hedging properties of REITs merit particular attention for institutional allocators managing liability-driven portfolios. Most lease agreements in REIT portfolios contain inflation-indexed escalation clauses, creating a natural pass-through mechanism whereby rising price levels translate directly into higher lease income and property valuations. This structural feature supports sustainable dividend growth during inflationary environments and enables investors to maintain real purchasing power—a critical consideration in 2021's macroeconomic environment.
The ALPS Active REIT ETF (REIT) exemplifies this investment approach by providing actively managed real estate exposure through an exchange-traded fund wrapper. This structure combines the diversification and professional management of active real estate selection with the liquidity and tax efficiency characteristics of ETF architecture, positioning it as a viable alternative for investors seeking PERE-equivalent returns without accepting the operational and leverage constraints of traditional private equity real estate vehicles.
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