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Private real estate can deliver powerful portfolio benefits. Understand the differences between private and public real estate.
Institutional investors have historically benefited by investing in privately owned (private) commercial real estate. Compared to publicly traded real estate, these benefits may include superior income returns, diversification and strong overall risk-adjusted returns (returns with less volatility). Owning private commercial real estate means investing in individual properties or through a pooled investment vehicle that is open to individual investors but is not listed on a stock exchange. Since private real estate is not publicly traded, it is not subject to the stock market volatility responsible for much of the fluctuation in the share prices of publicly owned (public) real estate.1 Private real estate investments do not provide the ready liquidity of public real estate.
In recent years, new investor-friendly structures with greater transparency and enhanced liquidity features have made an investment in private real estate more accessible to individual investors. Compared to a portfolio that included only public real estate, a portfolio inclusive of private real estate has historically generated better risk-adjusted returns — returns relative to the riskiness of the investment — in addition to adding the potential for income and diversification.2
The NCREIF Open-End Diversified Core (ODCE) Index, an equal-weighted time-weighted index representing a blended portfolio of institutional-quality real estate funds reported net of management and advisory fees (with the exception of the private real estate income data shown in the income return table below, which is reported gross of management and advisory fees) is a commonly used measure of private real estate, and is the index used in this report to represent private real estate. While funds used in this index have characteristics that differ from net asset value real estate investment trusts (NAV REITs), which include differing management fees, Black Creek Group’s management feels this index is an appropriate and accepted index for the purpose of evaluating returns on investments in NAV REITs.
In the past 20 years, private real estate has generated risk-adjusted returns that are approximately 2.5 times better than public real estate returns. Private real estate’s 6.6% income return represents more than 70% of its total return, an attractive feature to investors who want a balanced mix of growth and income.2
Public real estate returns have correlated with stock market returns more closely over time than private real estate returns, potentially making private real estate a more effective portfolio diversifier. From 2008–2017, 79% of public real estate returns were correlated to S&P 500 returns, up from a correlation of about 31% over the previous decade. Meanwhile, private real estate correlated only to 15% to 19% of S&P 500 returns over the past two decades, underscoring the diversification benefit of investing in private real estate vs. public real estate.2
Thanks in part to private real estate’s lower volatility, it has also produced stronger risk-adjusted returns — as defined by a higher Sharpe ratio — than public real estate over the past 20 years.3 A Sharpe ratio is one of the standard tools financial professionals use to compare investments. A Sharpe ratio represents the risk premium an asset generates relative to the volatility of its returns, where a higher figure indicates a better return relative to the riskiness of the investment. In the past 20 years, private real estate has generated risk adjusted returns that are approximately 2.5 times better than public real estate returns.
Individual investors are increasingly discovering there are diversification benefits to adding private real estate to their portfolios. Given private real estate’s historical income returns, diversification, and strong overall risk-adjusted returns, we believe it should have a place alongside stocks, bonds and public real estate in a diversified investment portfolio.
New investment products with investor-friendly shareholder structures and liquidity features have opened opportunities for individuals to invest in private real estate, providing access to its potential benefits with modest minimum investment requirements.
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Black Creek Group’s view of the current market environment as of the date indicated above. The data shown is for illustrative purposes only and investors are cautioned on relying upon the data presented as there is no guarantee that historical trends will continue or that Black Creek Group could benefit from such trends. Black Creek Group expressly disclaims any obligation or undertaking to update or revise any forward-looking statement contained herein.