Guest Contributor: Academic Study Finds Non-Traded NAV REITs Can Provide “Economically Large Alphas”

By Anya Coverman, president and chief executive officer, Institute for Portfolio Alternatives

For many years, retail investors had limited opportunities to invest in private real estate in the same way as the most sophisticated wealthy and institutional investors.

Small investors could always buy their own rental real estate — and with it, all the headaches of owning property. Or they could invest in publicly listed real estate investment trusts, which can have volatility similar to the stock market.

But a new option for retail investors arrived about seven years ago, with the advent of an innovative new generation of private real estate vehicles designed for both retail and institutional investors known as NAV REITs. NAV REITs aren’t listed on an exchange and are priced at net asset value. They are regulated by the U.S. Securities and Exchange Commission. These new funds have democratized investment options for small investors, providing the same sort of private real estate platforms long used by the largest institutions.

Indeed, many investors have concluded that with NAV REITs, they can allocate a reasonable portion of their portfolios to private real estate, with some liquidity. According to Stanger Investment Banking, as of Sept. 30, 2023, the market had grown to include 17 sponsors with 86 Share classes and roughly $110 billion in NAV and $210 billion in assets under management.

Because these vehicles are so new, there has been little academic research evaluating their performance. But now, professors Spencer J. Couts at the University of Southern California and Andrei S. Gonçalves at The Ohio State University have produced a paper – with support from the Institute for Portfolio Alternatives – examining the performance of these private real estate funds from 2016 to September 2023.

They found that “NAV REIT indices provided economically large alphas over our sample period relative to portfolios of publicly traded indices” of equities, bonds, and public real estate. They also found evidence that NAV REITs in their study “provided a large risk-adjusted return relative to public indices over the sample period.” Large alphas were referenced as greater than 5% per year, according to the report.

To ensure the study’s relevance to everyday investors, Drs. Couts and Gonçalves looked at how adding private real estate using a mix of NAV REITs would affect a typical investment portfolio made up of publicly traded REITs, bonds, and equities. The authors considered a reallocation of between 5%, 10%, and 20% of the portfolio to NAV REITs.

This approach showed noticeable improvements in performance: “NAV REIT indices added substantial (and statistically significant) alpha relative to the public market indices we study over the period of analysis.” These alphas varied from 0.5% to 3% per year depending on specification.

The authors adjusted their analysis to reflect unique aspects of private real estate investments, such as the semi-liquidity of NAV REITs and the subsequent impact on return calculations. Advanced methods were applied to present a more accurate picture of these investments’ risk and return profiles. The authors found that even using these methods, alphas “are still large economically and statistically.”

The authors also provided a simple calibration exercise to estimate the complicated question of how to quantify the effect of loads. They found that “long-term investors have experienced positive alpha over our sample period even with front-end loads, although front-end loads can entirely remove the alpha of NAV REITs for short-term investors.”

Recognizing that NAV REITs have been offered for only about seven years, the authors encourage additional research as these products are offered over a longer period and during times of high extended stress.

The study by Drs. Couts and Gonçalves provides encouraging evidence that NAV REITs can be a valuable component of a diversified investment portfolio.

Anya Coverman serves as president and chief executive officer of the Institute for Portfolio Alternatives, an advocacy organization for the portfolio diversifying investment industry. In this role, she leads the organizations’ efforts to bring together top asset managers, product distribution partners and industry service providers, as well as drive industry progress through education and advocacy initiatives. Previously, she served as IPA’s senior vice president of government affairs and general counsel. Prior to joining IPA in 2017, Coverman was the deputy director of policy and associate general counsel at the North American Securities Administrators Association, the national association representing state financial regulators. She has also practiced corporate and securities law at the international law firm Greenberg Traurig LLP in Washington, D.C. Coverman received her J.D. from American University’s Washington College of Law and her bachelor’s degree from the University of Miami.

The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire. Past performance does not guarantee future results.

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