The Pension Real Estate Association (PREA) is an organization of institutional real estate investors (pension funds and others) that, in recent years, sometimes was viewed as diminishing the role of real estate investment through publicly traded REITs. PREA seems now to be making a strong effort to address the REIT side of its members’ real estate portfolios, and a report just published is a good example.
In its new research report, “REITs and Real Estate: Is There Room for Both in a Portfolio?,” PREA has several good things to say about its members’ REIT holdings. Most importantly, PREA concludes that
by considering both private real estate and REITs in their menu of investment choices investors can improve the risk-return opportunities available to them; restraining choices to one one or the other runs the risk of a sub-optimal portfolio. ... Both REITs and private real estate have roles to play in a portfolio.
The PREA report highlighted a few of the advantages of REITs over other forms of real estate investment, including liquidity (“the recent financial crisis brought to the fore the fact that even institutional investors, usually thought of as the prototypical long horizon investors, can have short term liquidity needs”) and the fact that, because of that liquidity, even pension funds can use REITs for tactical asset allocation (“something extremely difficult with private real estate”).
Another big difference is that REITs have governance structures that are much more favorable to their investors than most private equity real estate investment managers. As PREA notes, “questions about the alignment of interests between general partners (fund managers) and limited partners (investors) in private equity funds arose during the financial crisis. By avoiding some of the more complicated aspects of return waterfalls and carried interest, REITs may avoid some of the issues that have arisen in private real estate.”
The PREA report does not answer all questions: for example, it compares returns on public (REIT) and private real estate investment using a time period that seems to provide an advantage to the private side. Still, PREA should be commended for working to serve its members comprehensively and recognizing the benefits that have caused many of them to invest so heavily through REITs.
Disclosure: Author is long Vanguard REIT Index Fund and ING Real Estate Fund.
Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.