Independent researcher of non-traded REITs, Blue Vault Partners (Blue Vault) cautioned readers of the hazards of comparing non-traded to publicly traded REITs in a recent blog post.According to Vee Kimbrell, Managing Partner of Blue Vault and author of this blog post, “Real estate cycles and the stock market do not move in lockstep with one another.”
Non-traded REIT performance is linked more closely with real estate cycles than publicly-traded REITs, which are susceptible to the whims of the market.
While Blue Vault concedes that there are some appropriate times to compare non-traded REITs with their traded counterparts, on the whole, the company champions benchmarks like the NCREIF (National Council for Real Estate Investment Fiduciaries) property index as a more suitable way to compare performances.
Kimbrell explains that since non-traded REITs have distinct stages, which include raising capital, investing in a portfolio, managing properties, and liquidating, the investments follow the “j-curve effect”. As a financial principle, the j-curve effect indicates an initial loss followed by a significant financial gain. This is often seen in non-traded REITs as returns are low or even negative in the beginning as a result of fees and the time it takes to acquire assets and for those assets to appreciate.
In its not yet published 2014 Non-traded REIT Full-Cycle Study, Blue Vault found that over a third of the non-traded REITs in its study outperformed the NCREIF National Property Index Returns.
The study compares the performance of 35 non-traded REITs that had a liquidity event between 1990 and July 2014 to the NCREIF National Property Index Returns.
The study also reveals that seven out of the 35 REITs were within 1.5% of the NCREIF returns across matched holding periods.
The NCREIF index does not include any fees, so Kimbrell notes, “it is meaningful that 20 of 35 non-traded REITs had better or comparable fee-adjusted shareholder returns to private portfolio investments in commercial real estate.”
Lastly, Kimbrell stresses that time is an important factor for gauging REIT progress and success. It can take several years before an evaluation of REIT strategy and efforts can be done.
To read Kimbrell’s post on Blue Vault’s web site, click here.