Why Exchange-Traded REIT Stocks are not Really Real Estate
Publicly traded real estate investment trusts (REITs) purportedly provide investors with convenient access to professionally managed real estate portfolios and the ability to buy and sell shares on a daily basis. However, for some investors—particularly those seeking long-term income, lower sensitivity to stock market fluctuations, and exposure to institutional-quality commercial real estate—non-traded real estate vehicles may offer characteristics that are more closely aligned with their investment objectives. While both structures provide real estate exposure, they differ significantly in valuation methodology, liquidity, volatility, and portfolio behavior.
One of the most important distinctions between publicly traded and non-traded real estate investments is how they respond to broader financial markets. Publicly traded REITs are listed on stock exchanges and their share prices fluctuate throughout the trading day. Although the underlying properties may generate stable rental income and maintain consistent occupancy levels, traded REIT prices are influenced not only by real estate fundamentals, but also by investor sentiment, interest-rate expectations, geopolitical events, and overall stock market conditions.
As a result, publicly traded REITs often behave more like equities than direct real estate investments over shorter time horizons. Research cited by Morningstar found that the FTSE Nareit Equity REIT Index exhibited a long-term correlation of approximately 0.59 with the S&P 500 Index over the period from 1972 through early 2021, indicating a meaningful relationship between publicly traded REIT performance and broader equity market movements.^1 Other research has found that correlations between publicly traded REITs and stocks tend to increase during periods of market stress, potentially reducing diversification benefits when investors may need them most.^2
By contrast, non-traded real estate investments are generally valued based on periodic appraisals, operating performance, property cash flows, and changes in net asset value rather than minute-by-minute trading activity. Consequently, private real estate has historically exhibited substantially lower reported volatility than publicly traded REITs. The National Council of Real Estate Investment Fiduciaries (NCREIF), whose Property Index has tracked institutionally owned commercial real estate since 1978, has consistently reported significantly lower volatility for private real estate than that experienced by publicly traded REIT indices.^3
It is important to recognize that some of this difference may result from valuation methodology. Because private real estate valuations are typically updated periodically rather than continuously, appraisal-based pricing may react more slowly to changing market conditions. Nevertheless, academic research has generally concluded that private real estate exhibits risk and return characteristics that differ meaningfully from those of publicly traded real estate securities.^4
Many investors also find non-traded real estate appealing because managers can focus on long-term property operations rather than short-term market expectations. Leasing decisions, capital improvements, refinancing strategies, and asset sales can be evaluated based on their potential to maximize long-term property value and cash flow rather than their impact on quarterly earnings expectations or market sentiment.
Private real estate has also historically provided diversification benefits within broader investment portfolios. Because returns are driven primarily by property income, occupancy trends, rental growth, and asset appreciation, private real estate has historically demonstrated lower correlation to stocks and bonds than publicly traded REITs.^5 Institutional investors, pension plans, endowments, and sovereign wealth funds have long allocated capital to private real estate in part because of its potential diversification characteristics and income-producing attributes.^6
Supporters of publicly traded REITs correctly note that daily liquidity provides flexibility. Investors can generally buy or sell shares whenever markets are open, and publicly traded REITs may be appropriate for investors who prioritize liquidity, tactical asset allocation, or short-term portfolio management. However, many long-term investors do not require immediate access to their invested capital. For such investors, the liquidity premium embedded in publicly traded securities may come with increased sensitivity to equity market volatility and investor sentiment.
Non-traded real estate investments, on the other hand, are generally designed for investors with longer investment horizons. By limiting daily trading activity, these structures may allow investors to focus more directly on the performance of the underlying real estate assets rather than short-term market fluctuations. In addition, many non-traded real estate vehicles provide access to diversified portfolios of institutional-quality properties that would otherwise be difficult for individual investors to acquire directly.
Ultimately, neither structure is inherently superior in all circumstances. Publicly traded REITs offer transparency, exchange liquidity, and ease of access. Non-traded real estate vehicles offer a different set of characteristics, including reduced exposure to stock market movements, a greater emphasis on property-level performance, and historically lower reported volatility. For certain investors with long-term investment horizons, income objectives, and limited liquidity needs, these characteristics may be preferable to the daily liquidity offered by publicly traded REITs.
Important Considerations
Non-traded real estate investments are generally less liquid than publicly traded REITs and may be subject to holding-period requirements, limited redemption programs, higher fees and expenses, and valuation methodologies that differ from public securities markets. Redemption requests may be limited, delayed, or suspended under certain circumstances. Investors should carefully review offering documents and consider their investment objectives, risk tolerance, liquidity needs, tax circumstances, and investment time horizon before investing. Past performance is not indicative of future results, and there can be no assurance that any investment strategy will achieve its objectives.
Footnotes
Ben Johnson, CFA, “Why I'm Lukewarm on Real Estate,” Morningstar, 2021. The article references a long-term correlation of approximately 0.59 between the FTSE Nareit Equity REIT Index and the S&P 500 Index over the period 1972–2021.
David C. Ling and Andy Naranjo, “Returns and Information Transmission Dynamics in Public and Private Real Estate Markets,” Real Estate Economics; see also research published by the National Association of Real Estate Investment Trusts (Nareit) regarding changing correlations between REITs and broader equity markets.
National Council of Real Estate Investment Fiduciaries (NCREIF), NCREIF Property Index (NPI). The NPI has tracked institutionally owned U.S. commercial real estate since 1978 and has historically exhibited substantially lower reported volatility than publicly traded REIT indices.
Jeffrey D. Fisher, David M. Geltner, and R. Brian Webb, “Value Indices of Commercial Real Estate: A Comparison of Index Construction Methods,” Journal of Real Estate Finance and Economics; and related research by David Geltner regarding appraisal smoothing and private real estate return measurement.
NCREIF historical data; Pension Real Estate Association (PREA) research; and institutional asset-allocation studies evaluating correlations among private real estate, equities, and fixed income investments.
Susan Hudson-Wilson, Jim Gordon, Frank J. Fabozzi, Mark J.P. Anson, and S. Michael Giliberto, “Why Real Estate?” The Journal of Portfolio Management, Special Real Estate Issue, 2005, along with subsequent institutional portfolio-allocation research evaluating the role of private real estate in diversified portfolios.
This version is substantially more defensible from a compliance perspective because it avoids absolute superiority claims, acknowledges liquidity and valuation limitations, attributes factual assertions to recognized third-party sources, and repeatedly frames the comparison in terms of investor objectives and suitability rather than investment quality.
This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
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A listed REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. Non-listed REITs also invest in real estate directly, but their shares are not listed on an exchange; redemptions are limited and may be suspended. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.
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