Should you invest through REITs or directly in private real estate assets?

Should you invest through REITs or directly in private real estate assets?

March 24, 2023

Real estate remains the most common sought-after alternative asset, due to the asset class’s historically high returns and low correlation with publicly traded equities (1) . 

Recognizing the intrinsic value of real estate, potential investors often ask about the differences between publicly traded REITs, and private placements in real estate. 

What to know when investing in real estate through publicly traded REITs

Publicly traded REITs (Real Estate Investment Trusts) are investment vehicles in the form of companies that finance or own income-producing real estate. These trusts offer a broad range of real estate asset types, including residential buildings, offices and industrial assets, as well as shopping malls and hospitality assets, and can provide liquidity and a passive diversification strategy to gain exposure to large real estate holdings.

This broad range of real estate asset types can be attractive to investors who seek liquidity and some exposure into large real estate holdings in order to diversify their portfolio. One drawback is the correlation of REITs to the stock market. Since they are marketable securities, they are directly impacted by market volatility.

Another potential drawback to the REIT structure however is a lack of transparency. Not only is the investment strategy decided by the trust managers, so too are the type of assets chosen for investment. Investors may find they will not have the pertinent details on underlying assets to assess the impact of potential macroeconomic metrics on the portfolio such as an increase in interest rates.

A REIT’s strategy could match an investor’s outlook to start, but change over time. Advanced investors often seek more agency over what deals they choose to invest in. 

What is entailed when you invest directly in private real estate 

As a stand alone asset class, real estate has historically been shown to have very low correlation to the stock market1 thereby mitigating overall portfolio risk for the investor as well as being a potential hedge against inflation. 

Investing directly in a real estate property can offer greater transparency in terms of the details of the underlying assets while giving investors equity ownership in a tangible asset. Unlike with a REIT, investors can select a number of criteria, such as asset type and geographic location, therefore diversifying their portfolio based on their own preferences. 

When choosing by asset type, investors can target sectors that are performing well, such as multifamily, or industrial assets. Investing in real estate deals based on location, meanwhile, can take into account trends such as rent growth, population growth, and job diversity in a particular market.

A portfolio fund or basket of deals can be attractive to investors seeking to gain access to multiple assets in a broad range of locations, via one contribution.

Typically, direct ownership in a real estate asset can potentially provide higher exit returns than publicly traded REITS (1). However, ownership cannot easily be transferred and therefore investors can expect to have longer holding terms.

What are the benefits of investing directly in real estate in a recessionary environment?

In a recessionary environment, the benefits of investing directly in real estate appear even more pronounced since they can serve as a hedge against inflation and possibly offer a more stable income stream due to long-term lease agreements. The underlying asset’s market valuation may not be impacted by stock market performance, given its tangibility and the low correlation with publicly traded securities. 

Lastly, the potential for higher exit returns exists when investing in Class B and C properties, versus REITs which are typically more weighted to Class A properties, an asset class which is typically most vulnerable to pricing pressure since renters will seek to reduce rent payments thereby moving to Class B properties.

 

Iintoo currently has a number of real estate deals available, including through a blended portfolio of multifamily assets, in a diverse set of submarkets, and a commercial asset which has been pre-leased to Planet Fitness for 10 years. If you are considering new investment opportunities log into iintoo’s platform now.

 

(1) Source: Nuveen: The Power of Private Real Estate Assets, Jan 2023