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http://www.reit.com/InstitutionalInvestors/InvestmentPerformance.aspx
Investment Performance
REITs offer strong long-term total returns. During the period from January 1978 through December 2008, equity REIT performance exceeded both the broad equity market and other forms of real estate investment by more than 1 percentage point per year, producing an average annual return of nearly 11.9 percent. As such, a $100 million investment in equity REITs at the beginning of that time period would have been worth more than $3,200 million by the end.
A comparison of real estate returns over rolling five-year periods for the 25 years from December 1982 through December 2008 further illustrates the strength of REITs’ long-term performance. Equity REITs experienced 22 five-year periods during which their average annual total returns exceeded 20 percent. They experienced an almost equal number, 23, of five-year periods of average annual total returns between 16 and 20 percent. Real estate investment through private vehicles, as measured by the NCREIF Property Index (NPI), experienced a single five-year period with returns between 16 and 20 percent and none with returns greater than 20 percent. Equity REITs had no periods of negative returns during the time series.
Leverage
Equity REITs use moderate leverage, on average approximately 40 percent; and use it very effectively. As a result, REITs offer favorable returns relative to leverage.
As the chart below shows, given a fixed gross return (based on the NPI) and a 6.50 percent cost of capital, REIT returns compensate investors over and above the return that would simply be achieved by using leverage‑suggesting that REITs create additional value for investors in excess of the returns that should be achieved simply through financial engineering.
Source: NAREIT
REITs have higher Sharpe ratios, in general, compared with other capital markets alternatives. The Sharpe ratio tells us how efficient a portfolio’ returns are relative to risk assumed in the portfolio. This measurement is a very useful as a tool when deciding what assets to use in building a portfolio. The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been.
Source: NAREIT
Additionally, a slew of research published during the last decade has shown that REITs’ consistent outperformance persists even after returns are adjusted to account for major differences in the different styles of investment, such as leverage and management fees. One such study in 2007 by Jengbin Patrick Tsai, a former graduate student at the Massachusetts Institute of Technology, concluded that after controlling for fees, leverage and property-sector mix, REITs generated an average annual return that was still almost three percentage points higher than direct real estate investment from 1985 to 2005.3
What accounts for the persistence of REIT out performance? The answer is not clear cut. However, it is likely to be a combination of factors including cost, property selection, management efficiency, and the rigors and transparency required by virtue of listed REITs being publicly traded.
Risk-Adjusted Returns
Excellent long-term performance and strong diversification attributes make REITs a natural component of a well-balanced, efficiently performing portfolio. Adding REITs to the typical investment portfolio can have a dramatic impact on its long-term stability and returns, as evidenced by a recent analysis from Ibbotson Associates.
Return: 10.7% Return: 11.1% Return: 11.5%
Risk: 10.9% Risk: 10.6% Risk: 10.5%
Sharpe Ration: 0.42 Sharpe Ration: 0.48 Sharpe Ration: 0.52
Investment Performance
REITs offer strong long-term total returns. During the period from January 1978 through December 2008, equity REIT performance exceeded both the broad equity market and other forms of real estate investment by more than 1 percentage point per year, producing an average annual return of nearly 11.9 percent. As such, a $100 million investment in equity REITs at the beginning of that time period would have been worth more than $3,200 million by the end.
A comparison of real estate returns over rolling five-year periods for the 25 years from December 1982 through December 2008 further illustrates the strength of REITs’ long-term performance. Equity REITs experienced 22 five-year periods during which their average annual total returns exceeded 20 percent. They experienced an almost equal number, 23, of five-year periods of average annual total returns between 16 and 20 percent. Real estate investment through private vehicles, as measured by the NCREIF Property Index (NPI), experienced a single five-year period with returns between 16 and 20 percent and none with returns greater than 20 percent. Equity REITs had no periods of negative returns during the time series.
Leverage
Equity REITs use moderate leverage, on average approximately 40 percent; and use it very effectively. As a result, REITs offer favorable returns relative to leverage.
As the chart below shows, given a fixed gross return (based on the NPI) and a 6.50 percent cost of capital, REIT returns compensate investors over and above the return that would simply be achieved by using leverage‑suggesting that REITs create additional value for investors in excess of the returns that should be achieved simply through financial engineering.
Source: NAREIT
REITs have higher Sharpe ratios, in general, compared with other capital markets alternatives. The Sharpe ratio tells us how efficient a portfolio’ returns are relative to risk assumed in the portfolio. This measurement is a very useful as a tool when deciding what assets to use in building a portfolio. The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been.
Source: NAREIT
Additionally, a slew of research published during the last decade has shown that REITs’ consistent outperformance persists even after returns are adjusted to account for major differences in the different styles of investment, such as leverage and management fees. One such study in 2007 by Jengbin Patrick Tsai, a former graduate student at the Massachusetts Institute of Technology, concluded that after controlling for fees, leverage and property-sector mix, REITs generated an average annual return that was still almost three percentage points higher than direct real estate investment from 1985 to 2005.3
What accounts for the persistence of REIT out performance? The answer is not clear cut. However, it is likely to be a combination of factors including cost, property selection, management efficiency, and the rigors and transparency required by virtue of listed REITs being publicly traded.
Risk-Adjusted Returns
Excellent long-term performance and strong diversification attributes make REITs a natural component of a well-balanced, efficiently performing portfolio. Adding REITs to the typical investment portfolio can have a dramatic impact on its long-term stability and returns, as evidenced by a recent analysis from Ibbotson Associates.
Return: 10.7% Return: 11.1% Return: 11.5%
Risk: 10.9% Risk: 10.6% Risk: 10.5%
Sharpe Ration: 0.42 Sharpe Ration: 0.48 Sharpe Ration: 0.52
