Experienced real estate investors know there are multiple ways to access this asset class, including listed or publicly traded real estate investment trusts (REITs) and privately held real estate, which is usually reserved for high-net-worth investors and professional market participants.
As such, some real estate novices are apt to think the segment they can’t get into — private real estate — generates better returns. However, accessible approaches, such as the Virtus Duff & Phelps Global Real Estate Securities (VGISX), can offer real estate investors considerable long-term value.
A recent article in the Journal of Portfolio Management noted that the performance of closed-end private equity real estate funds (PERE) trailed what was offered by listed real estate.
“Rather than simply comparing index returns, this methodology uses fund-level data to account for variables including inception dates and investment horizons of individual PERE funds. The study’s sample of 375 U.S.-focused PERE funds underperformed listed real estate, as measured by the FTSE EPRA/NAREIT U.S. Net Total Return Index, by an average of 165 basis points annually when analyzed over the last 20 years,” according to Virtus research.
As an actively managed fund, VGISX could be ideally positioned to take advantage of that scenario, particularly in what’s becoming a rapidly evolving real estate landscape. In fact, many private real estate opportunities are heavily exposure to commercial office space — a real estate segment that’s still scuffling a bit in the wake of the coronavirus pandemic. Active management can help VGISX steer clear of or reduce exposure to some REIT trouble spots.
Additionally, listed real estate often features superior liquidity relative to the PERE option, and while that liquidity may warrant premium, it can reward investors over longer holding periods.
“For investors who must pay particular attention to short-term drawdown risk—such as retirement funds with on-going cash needs—liquidity is essential. REITs may be a great choice for investors who need access to income-producing real estate sectors such as apartments, self-storage, and industrial buildings, but do not want to sacrifice liquidity. Conversely, a typical closed-end PERE fund is less liquid and may require investors to supply ‘dry powder’ whenever the fund chooses to call for it,” added Virtus.
Another point in favor of VGISX is that the listed real estate universe is usually more industry-diverse than its PERE counterpart. VGISX reflects as much.
“In fact, REIT sectors have changed significantly over the last decade. In 2010, the largest sectors were traditional property types, including retail centers, residential, health care, and office. Since then, the number of U.S. REIT sectors has grown from nine to 12 and may be considered as high as 17 if retail and residential subsectors are included,” concluded Virtus.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.