Public versus Private Real Estate Equities

Abstract

Comparisons of the performance of public and private real estate equities are provided in this article. In so doing, the authors control for three of the main differences between these investment alternatives: property-type mix, leverage and appraisal smoothing. They then ran tests to determine in a statistical sense whether the restated means and volatilities of the two series were in fact different from one another. The clear answer is that they were not, suggesting a fairly seamless real estate market in which public- and private-market vehicles display a long-run synchronicity. This has two important implications for portfolio management. First, public- and private-market vehicles ought to be viewed as (somewhat interchangeably) offering investors a risk/return continuum of real estate investment opportunities. Second, while the “platform” did not matter in terms of observed return characteristics, the platform may matter with regard to liquidity, governance, transparency, control, executive compensation, and so on, an apparent clientele effect hints that these issues may be valued differently by large and small investors.