Private Real Estate Vs REITS – Best Property Returns


We Brits love real estate. I know many people who invest in property but would never touch another asset class. There is something about real estate that draws people in. Whether its tangible properties, high current income, long-term appreciation potential or inflation protection properties, people just love to invest in real estate. Its almost becoming an obsession.




Whilst many people want to invest in property, they want to know what is the best way to do so.

Should they invest in buying properties outright on their on or should they use real estate investment trusts which are listed on the stock exchange. What are the historical returns? This article will help answer the mentioned questions.

 

Looking at data from reit.com , from 1992 until 2017 the returns were as follows:

  • Private Real Estate Investments – 7%
  • REITS – 11%

 

REITs outperformed private real estate by 4% per annum!

 

In other words, if you invested £1,000,000 in REITs rather than in private equity real estate 25 year ago, you would have nearly two and half times more today. Interestingly, REITs crushed private peers with much lower average leverage, better diversification, a stronger focus on quality properties, and less risky strategies in general.

So why did REITS outperform private property?

A big reason is due to REITs having better access to different capital sources.

 

REITs can raise finance by issuing new shares, raising new debt, and investing these proceeds in new acquisitions. As long as the expected return of the property is greater than the average cost of capital, there’s a positive spread to be earned for the existing REIT shareholders. 

 

Furthermore, REITS can acquire debt at cheaper rates than individuals due to higher credit ratings.

 

The other advantage of REITS, is that it offer the opportunity to invest in broad and widely diversified portfolios of properties in a liquid and cost-efficient manner. With REITs, you can easily invest in all property sectors including office, retail, industrial, residential and many other specialty sectors in almost any geographical location.

 

This results in significant risk mitigation as compared to private investments, which are likely to be much more concentrated in nature. Being concentrated can sometimes lead to higher returns, but it’s also clearly a riskier strategy that has historically not even paid off.





As an individual, it can be more tax efficient to invest in real estate via REITS as opposed to private property. REITs own properties and are able to pass through the rental income to dividends without paying tax, which is an attractive structure for an income investor to own. The investor also pays 0% in taxes if the REIT shares are held in an ISA or SIPP account.

 

So there you have it. REITs have historically generated total returns far exceeding those of private real estate investments. The risk adjusted return of REITS in particular is far higher that private real estate returns.

Please like & share: