Private REITs: a solid capital growth investment

TODAY WE WELCOME Greg Placidi as a new column contributor with RENX. Placidi is chief investment officer and portfolio manager at Equiton Partners, and will contribute occasional columns focused on Real Estate Wealth Insights.

Many investors are wondering how to invest these days given the wild swings in the stock market and all the uncertainty in the economy.

If you have been concerned about the impact that the next public market crises may have on your investment portfolio, perhaps it’s time you think about adding a more stable alternative investment, such as real estate.

Traditionally, if you wanted to invest in real estate, you’d purchase a property, rent it out, collect the rent, try to increase the value by renovating, and then make a profit when you sell it. This can be a very time-consuming process and challenging to diversify your risk since the more properties you buy, the greater your financial and time commitments become.

A better way might be to invest in real estate investment trusts (REITs). This would give you the benefits of diversifying your portfolio with real estate without having to become a ‘landlord.’

REIT funds are used to purchase and hold properties that produce income. A portion of the rental, or lease income, generated from the properties is paid to the investors in the form of distributions.

Public REITs vs. private REITs

REITs come in two forms – publicly traded and private.

Publicly traded REITs are listed on stock exchanges and therefore their value is tied to the price at which their shares trade on the exchange. This makes them more susceptible to being influenced by emotions (such as fear and greed) that often drive public markets. On the other hand, unitholders of private REITs are largely insulated from broader market fluctuations, as their net asset value, not market sentiment, drives pricing and valuation.

IMAGE: For a larger version of this graphic, click this link. A scaleable version will open in a separate window.

Total returns during the 2008 financial crisis: For a larger version of this graphic, click this link. A scaleable version will open in a separate window.

To illustrate this meaningful difference, let’s consider the 2008 financial crisis.

During this time, the TSX fell approximately 33 per cent and the public REIT index fell approximately 38 per cent. That year, the private apartment index and the broad-based private commercial real estate index experienced positive returns of 6.5 per cent and 3.8 per cent, respectively.

The performance of your portfolio would have been significant improved if you were invested in private REITs rather than publicly traded REITs.

IMAGE: For a larger version of this graphic, click this link. A scaleable version will open in a separate window.

For a larger version of this graphic, click this link. A scaleable version will open in a separate window.

Graph 2 reveals that the returns on public REITs are more correlated to the returns of the broader equity market than they are to private real estate. Therefore, adding private REITS to your portfolio should help to add stability to your investments by providing better diversification in comparison to public REITS.

Diversify with private, income-producing RE investments

Canadian income-producing real estate (office, industrial, retail, multi-residential, etc.) has historically displayed low correlations to many of the traditional major asset classes, thereby providing investors with potentially valuable diversification benefits, such as improving both the efficiency of their investment portfolio and their risk-adjusted returns.

In other words, when portfolio investments are efficient, investors may achieve higher levels of return for the same level of risk.

As well, using private commercial real estate to diversify a portfolio may potentially generate more consistent returns. Private commercial real estate has historically generated favourable absolute and relative total returns.

Over the past 31 years, multi-residential properties, the best performing of the primary real estate classes, outperformed Canadian bonds by over 60 per cent and Canadian equities by 13 per cent. The lowest annual return for multi-residential properties was a positive 1.7 per cent return versus -0.17 per cent for Canadian bonds, -31.4 per cent for Canadian equities, and -41.4 per cent for emerging market equities.

For a larger version of this graphic, click this link. A scaleable version will open in a separate window.

For a larger version of this graphic, click this link. A scaleable version will open in a separate window.

The size of the bars in Graph 3 represents the range of annual returns recorded by each of the asset classes over the last 31 years. The larger the bar, the larger the disparity was between the highest return and lowest returns achieved by the asset class.

And although short-term investors might view the higher liquidity of public REITs as being beneficial, longer-term investors will be more focused on unlocking the value of the underlying real estate and will place less importance on daily liquidity.

Daily liquidity vs. longer-term investments

As was the case in 2008, daily liquidity comes at potentially a very high cost since price discovery is based on external market mechanisms rather than the value of the underlying real estate.

Even during normal market conditions, if enough investors decide to sell a public REIT or if a hedge fund decides to actively short a public REIT, the share price will be negatively impacted, although there may not have been any corresponding change to the value of the underlying real estate.

Private REITs are not meant to be short-term investment and should be treated as a means to earn long-term cash flow and capital appreciation.

In short, if private REITs are not a part of your portfolio, now is the time to consider them.

Asset allocation is a large determinant of investment success. Private REITs have a low correlation to other asset classes, higher expected returns and lower volatility.

That makes it a trifecta of investing.

Equiton is a private equity firm specializing in providing private market real estate investments to Canadians.  It is led by a senior team of industry veterans who have more than 100 years of combined real estate, investing and management experience.  Collectively they have overseen the acquisition and management of over $10 billion in real estate, developed over 100 million square feet of real estate projects and overseen a combined portfolio of more than 10,000 apartments in Canada and the U.S.


Greg is an accomplished investment professional with significant experience in managing a wide array of investment portfolios. Over the last 30 years, Greg’s career has centred around global financial services…

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Greg is an accomplished investment professional with significant experience in managing a wide array of investment portfolios. Over the last 30 years, Greg’s career has centred around global financial services…

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