Piping Rock Partners | Private Real Estate Investments


					Why Private Real Estate and not REITs?

					For asset allocation models to be effective, asset class performance should be uncorrelated. Strict asset allocators like real estate because the macro-economic factors affecting stocks and bonds do not influence real estate investments to the same extent. Real estate investment performance is driven to a much larger degree by micro-economic factors like local job creation and population growth, changes in zoning laws, and the supply and condition of competing properties. More significantly, real estate markets are inefficient and opaque in comparison to public equity and debt markets, particularly for properties that require re-positioning. Every real estate asset is unique, and pricing tends to be imprecise and information uneven. There are fewer participants in the marketplace, specialized knowledge is required, and search and transaction costs are much higher. These inefficiencies, in part, are why real estate tends to increase the returns of an investment portfolio while lowering volatility. Since public REITs own commercial real estate, investors and their advisors often use them as a substitute for direct investments. However, public REITS are not the same as privately-held real estate, and they offer few of the same benefits.
					Studies have shown that public REITs are correlated to the broader equity and debt markets and, historically, have had higher volatility than directly owned real estate assets. Bailard, an independent investment advisor, examined 24 years of REIT returns and found that not only did REITs experience three times more negative return years than privately held real estate (see left hand chart), but the magnitude of negative REIT returns was much greater than privately held real estate. Not surprisingly, Bailard also found that privately held real estate generally offered far greater return consistency. Read the full Bailard report here. REIT volatility was especially high during the financial crisis. Since its inception in 1990 through the end of 2007, the Dow Jones Equity All REIT Index closed up or down by more than 5% on only three occasions. From September 2008 through March of 2009, that happened 64 times. Making matters worse, REITs are tax disadvantaged when compared to direct investments in real estate. Unlike REITs, direct investments in real estate generally enjoy the benefits of tax sheltered current income, while REIT dividend income is fully taxable as ordinary income or capital gains.

			Mortgage REITs		Proper asset allocation calls for real real estate exposure. That means private market investments, not public REITs. Contact us to learn more about our private real estate investments, designed specifically for Registered Investment Advisors and family offices. TOP OF PAGE
			Chris Germain, San Francisco