When considering an investment in commercial real estate, it is imperative to understand the differences between investing in public versus private real estate. Both forms of investment have unique benefits and risks which should be considered along with specific investment goals and preferences.
A Real Estate Investment Trust is a publicly registered real estate company that owns, operates or finances commercial real estate for the benefit of its shareholders. REITs may provide investors the chance to invest in valuable real estate related assets, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive and revitalize. REITs of all types collectively own more than $3 trillion in gross assets across the U.S., with stock-exchange listed REITs owning approximately $2 trillion in assets. Public REITs have a regulatory requirement set by the Securities and Exchange Commission (SEC) that requires the REIT to distribute at least 90% of taxable income to shareholders in the form of dividends. These passthroughs are not taxed at the REIT level and therefore get flow through treatment by the IRS that mirrors direct ownership of the assets. There are two types of public real estate investments; public listed real estate and public non-listed real estate.
Public listed REITS are traded on public stock exchanges and, therefore, the most liquid form of real estate investing. Investors of publicly listed REITs can move in and out of their investment at any time by buying and selling REIT shares. The trade-off for increased liquidity is typically increased volatility, occasionally driven by broader stock market volatility. Because publicly traded REITs have immediate liquidity, there may be pressure to focus on short-term quarterly earnings rather than long-term investment objectives source. Public REIT performance may suffer by stock-market downturn even if the underlying fundamental aspects of the property portfolio are sound. This volatility risk, which tracks the movements in the stock market, is called correlation risk. For this reason, among others, institutional investors often do not consider an investment in publicly traded REITs to be a direct investment in commercial real estate.
Public non-listed REITS are not listed on a stock exchange, such as the NYSE. This means their shares are not directly subject to stock market volatility, which may help allow their managers to focus on long-term objectives rather than near-term price fluctuation and quarterly earnings. Though they are not publicly traded on an exchange, there are required SEC filings and performance reporting is publicly available. Public non-listed REITs have historically had a low performance correlation, sourced relative to more conventional, publicly traded assets, but they also have less liquidity. Many professional investment advisors believe that having a balanced portfolio mix of asset classes should include non-correlated assets, so there is a balancing force that reduces overall portfolio volatility.
Anyone can invest in Public non-traded REITS, whether they are accredited or non-accredited, subject to certain investment limits.
In addition to Public Traded REITs and Public Non-Traded REITs, many investors access investment in commercial real estate through Private REITs. Private REITs are generally available only to accredited investors, who are defined as having over $1 million in net worth (excluding personal residence) and over $200,000 in annual income over the prior two years. Private real estate funds are not registered with, nor regulated by, the SEC. As a result, they are able to purchase and/or rehabilitate properties without the restrictions imposed by SEC rules. This allows private real estate managers the flexibility to invest with a more pure institutional style, in a larger universe of favorable investment opportunities, which can lead to a more competitive total return than public REITs. Private real estate investments usually do not provide liquidity in the same manner as public real estate. Because of this, investors typically expect higher returns or what’s also known as an “illiquidity premium”.