Key Takeaways
- • Listed REITs delivered average annual net returns of 9.72% over a 26-year study period (1998–2023), outperforming private real estate by nearly 200 basis points, according to a CEM analysis covering defined benefit plans.
- • REITs won 68% of head-to-head matchups against both domestic and global private equity real estate (PERE) funds, with IRR-based outperformance ranging from 165 basis points annually against seasoned PERE funds to 186 basis points against economic life funds.
- • Private real estate generated average annual net returns of 7.79% over the same period, with performance varying significantly by investment style: core funds, value-added/opportunistic funds, and fund-of-funds all underperformed REITs on average.
- • REIT and private real estate returns exhibited a 0.90 correlation when adjusted for reporting lags on illiquid returns, reflecting their underlying asset similarities while demonstrating REIT liquidity advantages and lower expense structures.
- • REITs ranked fourth among 12 asset classes studied, outperforming all private real estate ownership styles except internally managed direct real estate strategies over the long-term period.
Summary
A comprehensive CEM analysis spanning 26 years (1998–2023) demonstrates that publicly listed REITs have substantially outperformed private equity real estate funds in defined benefit plan allocations, challenging conventional wisdom about the return potential of illiquid, alternative real estate strategies. The study found that REITs delivered average annual net returns of 9.72%, compared to 7.79% for private real estate—a performance gap of nearly 200 basis points annually.
The outperformance was consistent across REIT versus private real estate fund comparisons. Based on internal rate of return (IRR) calculations, listed REITs outperformed seasoned PERE funds by an average of 165 basis points per year and economic life funds by 186 basis points annually. In direct head-to-head matchups, REITs won 68% of contests against both domestic and global private equity real estate funds. Among the 12 asset classes examined in the broader study, REITs ranked fourth in average annual returns, ahead of all major private real estate ownership styles with the exception of internally managed direct real estate strategies.
Performance variation within private real estate strategies was notable. Core funds, value-added/opportunistic funds, and fund-of-funds structures all trailed REIT returns, though the magnitude of underperformance differed by strategy. The CEM analysis also contextualized real estate within the broader investment universe, showing that hedge funds/tactical asset allocation strategies, U.S. broad bonds, and U.S. other fixed income produced the three worst returns over the period, though the latter two categories carried significant cash holdings that depressed yields.
The correlation analysis revealed a 0.90 correlation between REIT and private real estate returns when adjusted for reporting lags on illiquid holdings, indicating substantial underlying asset similarity between the two investment vehicles. However, REIT and private real estate returns demonstrated similar correlations with both bond and equity market returns, suggesting comparable systematic risk exposure. The high correlation underscores that the REIT outperformance advantage stems primarily from superior expense management and liquidity efficiency rather than fundamentally different real estate exposure.
The outperformance was consistent across REIT versus private real estate fund comparisons. Based on internal rate of return (IRR) calculations, listed REITs outperformed seasoned PERE funds by an average of 165 basis points per year and economic life funds by 186 basis points annually. In direct head-to-head matchups, REITs won 68% of contests against both domestic and global private equity real estate funds. Among the 12 asset classes examined in the broader study, REITs ranked fourth in average annual returns, ahead of all major private real estate ownership styles with the exception of internally managed direct real estate strategies.
Performance variation within private real estate strategies was notable. Core funds, value-added/opportunistic funds, and fund-of-funds structures all trailed REIT returns, though the magnitude of underperformance differed by strategy. The CEM analysis also contextualized real estate within the broader investment universe, showing that hedge funds/tactical asset allocation strategies, U.S. broad bonds, and U.S. other fixed income produced the three worst returns over the period, though the latter two categories carried significant cash holdings that depressed yields.
The correlation analysis revealed a 0.90 correlation between REIT and private real estate returns when adjusted for reporting lags on illiquid holdings, indicating substantial underlying asset similarity between the two investment vehicles. However, REIT and private real estate returns demonstrated similar correlations with both bond and equity market returns, suggesting comparable systematic risk exposure. The high correlation underscores that the REIT outperformance advantage stems primarily from superior expense management and liquidity efficiency rather than fundamentally different real estate exposure.
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