PUBLIC VS. PRIVATE REAL ESTATE: WHAT'S THE DIFFERENCE?

There are two markets for real estate investment—public and private. Public real estate is held in the form of real estate investment trusts (REITs) and traded on the various stock exchanges. Their values fluctuate constantly, just like any other stock. When investors buy shares of a public REIT, the price paid is determined by the market value of the company at that place in time, rather than the market value of the underlying real estate assets.

Private real estate as an asset is distinct from other investments or commodities in that it is insulated from the fluctuations of the public markets. Of course, private investments aren't as liquid as stocks, but it's the liquidity of a public REIT that brings volatility to an otherwise stable investment.

Witness the sell-off that took place when the public markets reacted to the collapse of Lehman brothers in September of 2008. While the reality was that very few REITs were directly tied to Lehman's fate, many investors started dumping REIT stocks en masse. Investors became confused and reacted fearfully, selling their shares and decimating the unit prices to the point where most fell by 50% or more in less than six months. All the while, most REITs remained well capitalized, had decent debt-to-capitalization ratios, and held portfolios of well-performing real estate assets.

In contrast, owning units in a private syndication removes that risk. A private syndication does not have an active secondary market like the stock exchanges, and is therefore immune to their volatility. The investment is made in a specific property rather than a stock, so the "herd instinct" associated with a public listing is eliminated. These traits allow investments in private syndications to contribute to income generation and wealth creation for individuals, family trusts, wealth managers, and private investment funds alike.

As seen in the chart below, private real estate (as represented by the National Council of Real Estate Investment Fiduciaries, or NCREIF) has a low or negative correlation with stocks, bonds and public real estate (as represented by the National Association of Real Estate Investment Trusts, or NAREIT). This low correlation means that private real estate returns generally do not move in tandem with those of the other asset classes. For example, and highlighted by the red arrows below, private real estate's (NCREIF) correlation with the Russell 2000 over the past decade is 0.21, with 1.0 representing a perfect correlation and 0.00 representing no correlation at all. In contrast, the correlation of REITs (NAREIT) with the Russell 2000 over the same period is 0.77. The same is generally true when comparing private real estate and REITs with the S&P 500: 0.23 versus 0.71.

So as you can see, the difference is clear: Private real estate affords investors the opportunity to build wealth with greater stability and lower risk.