As an asset class, private equity is alluring to an array of investors, and one of the private equity big investment competencies is real estate.
Private equity firms own everything from apartment buildings to casinos to data centers to commercial real estate to hotels and much more. While these companies often generate impressive returns in the real estate arena, smaller investors can do the same with exchange traded funds such as the ALPS Active REIT ETF (NASDAQ: REIT).
The actively managed REIT is a relevant consideration not only for investors seeking real estate exposure, but also those looking to be on par with or beat private equity firms. The odds just might be on REIT’s side when it comes to that.
“New research by a team of academic researchers and practitioners compares private equity real estate (PERE) fund performance with REITs over matched investment horizons,” according to Nareit. “In the US, REIT returns exceeded PERE risk-adjusted returns by 590 basis points, on average; and won 68% of head-to-head matchups on a risk adjusted basis. In global funds, REIT returns exceeded PERE risk-adjusted returns by 619 basis points, on average; and won 68% of head-to-head matchups on a risk adjusted basis.”
REIT has other advantages to offer investors. As the Nareit study notes, the standard closed-end fund private equity real estate asset isn’t nearly as liquid as a listed REIT and carries significantly more leverage.
Aside from possibly beating private equity rivals, REIT has the potential to top something that is highly relevant today: inflation.
“Because most leases are tied to inflation, income from leases and property values tend to increase when overall price levels rise. This supports REITs’ dividend growth and helps investors to pursue real income during inflationary periods. In all but three of the past 20 years, REITs’ dividend increases have outpaced inflation as measured by the Consumer Price Index,” according to State Street research.
While REIT yields have declined this year due to rising share prices, real estate equities, broadly speaking, still offer higher yields than government bonds and the S&P 500.
Other REIT ETFs include the Schwab US REIT ETF (NYSEArca: SCHH) and the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR).
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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.
