​Public REITs or Private Real Estate Funds?

[Vince DeCrow]

Commercial real estate investments can offer long-term returns that are both healthy and stable. More significantly, commercial real estate is an asset class that can decrease volatility and increase returns when its added to an investment portfolio made up of stocks and bonds.

Something I've found that is often overlooked by individuals making a commercial real estate allocation is that the specific type of commercial real estate investment that you choose can make have different impacts on your overall investment portfolio than others. A question that I frequently receive from prospective investors is, why invest in Origin's funds over of a publicly traded REIT?

Both products boast similar target returns, and public REITs have things going for them, such as:

• A track record of double digit percentage annual returns;
• Dividends that have increased over time; and
• Liquidity.

With that said, when it comes to deciding between a publicly traded REIT and a private equity real estate fund to invest in, you should choose both.

They are different types of investments and both have their place in a diversified portfolio. There are several benefits of adding private real estate funds to your portfolio that may already include REITs.

1. Unlike public traded REITs, private equity real estate isn’t tied to stock market fluctuations.

While public REITs can be lucrative investments, they are highly correlated to the stock market. That means they can rise and fall based on what’s happening in the stock market, and their values can be impacted by events that have nothing to do with real estate fundamentals. Because of this, adding publicly traded REITs alone will not necessarily improve your portfolio’s risk-adjusted returns.

2. Publicly traded REITs achieve different investing goals than private real estate funds.

When evaluating a potential investment, it important to look at alpha and beta. Beta measures the volatility of a fund relative to the market by gauging how much the fund’s returns move up or down given the gains or losses of its benchmark market index. Alpha is the difference between a fund’s expected returns based on its beta and its actual returns.

Public REITs are a good example of the difference between alpha and beta.

With pubic REITs you are essentially buying beta, while a private equity real estate fund seeks to achieve alpha—and does with strategic business plans for properties and skilled asset managers. Origin’s goal is to outperform the market on a risk-adjusted basis and achieve returns well above the index. We focus on finding high quality, under performing commercial real estate properties that have solvable problems. Our philosophy is that this is the best way to protect the downside while maximizing the upside of each deal.

3. Publicly traded REITs are a volatile asset class

If the economy tanks, REITs can get hit hard. Since the year 2000, REITs “are second only to emerging-market stocks as the most volatile asset class”, according to the WSJ. Private equity real estate funds are significantly less volatile that public REITs. Thus, you can help to diversify and minimize the overall volatility of your portfolio by adding private equity real estate funds.