Investors can be fooled by comparing volatility or risk-adjusted returns of assets over the wrong investment horizon. Real estate returns are commonly reported quarterly, but most institutional and retirement investors (including endowments, foundations, and pension funds) have multi-year investment horizons. These graphs show volatility and risk-adjusted returns based on the reported returns for five different types of U.S. real estate investment: listed equity REITs, unlevered core properties, core funds, value-add funds, and opportunistic funds. Quarterly data makes it seem as though unlisted real estate is much less volatile than listed equity REITs, but that's only because unlisted real estate returns are measured very poorly, with substantial smoothing. For basically all assets, volatility over long investment horizons is less than over short horizons: that just means that volatility measures uncertainty about returns, and average returns over long periods aren't very uncertain. That effect shows up very strongly with listed assets, including listed equity REITs, but not very strongly with unlisted assets, including private real estate, because volatility has already been disguised through the appraisal process. Quarterly data makes it seem as though unlisted real estate has provided better risk-adjusted returns than listed equity REITs, but the truth is the opposite: listed U.S. equity REITs have provided dramatically better risk-adjusted returns than private U.S. real estate investments over historical periods extending back to the beginning of 1978.

1. Volatility Declines as Holding Periods Increase
Much More Dramatically for Publicly Traded REITs
Volatility of Investments by Holding Period
20%
18%
16%
Annualized Volatility
14%
1
2
4
6
8
10
12
14
12%
10%
8%
6%
4%
2%
0%
Equity REITs
Opportunistic Funds
Value Added Funds
Core Funds
Unlevered Core
Properties
Note: Based on quarterly net returns over the available historical period: 1978Q1-2013Q2 for equity REITs, core funds (ODCE), and unlevered core properties (NCREIF Property Index);
1988Q2-2012Q2 for value added funds (NCREIF/Townsend Fund Indices); and 1988Q4-2012Q2 for opportunistic funds (NCREIF/Townsend). Fees and expenses are assumed to total 50
basis points per year for publicly traded equity REITs and 100 basis points per year for unlevered core properties; fees for other investments are as given. Source: NAREIT analysis of
data from NCREIF and FTSE NAREIT Equity REITs Index.
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2. Publicly Traded Equity REITs Provide Better Risk-Adjusted Net
Returns than Private Equity Real Estate Funds
Risk-Adjusted Returns of Investments by Holding Period
1.6
1.4
1.2
1
2
Sharpe Ratio
1.0
4
6
0.8
8
10
0.6
12
14
0.4
0.2
0.0
Equity REITs
Opportunistic Funds
Value Added Funds
Core Funds
Unlevered Core
Properties
Note: Based on quarterly net returns over the available historical period: 1978Q1-2013Q2 for equity REITs, core funds (ODCE), and unlevered core properties (NCREIF Property Index);
1983Q2-2013Q2 for value added funds (NCREIF/Townsend Fund Indices); and 1988Q4-2013Q2 for opportunistic funds (NCREIF/Townsend). Fees are assumed to total 50 basis points per
year for publicly traded equity REITs and 100 basis points per year for unlevered core properties; fees for other investments are as given. Risk-adjusted rate is Citigroup 1-mo U.S.
Treasury TR. Source: NAREIT analysis of data from NCREIF and FTSE NAREIT Equity REITs Index.
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