LPs are expected to invest $8 billion of new capital to value-added and opportunistic funds in 2010. REITs believe some of that money should go to them. PERE magazine June 2010

REITs have proved worthy adversaries for private equity real estate fund managers when it comes to closing US deals.

However the public property rivals are also on the offensive when it comes to LP allocations, with the industry’s body group last month releasing performance data that shows real estate investment trusts have out-performed private value-added and opportunistic funds over the past 17 years.

The National Association of Real Estate Investment Trusts (NAREIT) has published research comparing the returns of listed REITs in the US against the returns of open-ended, closed-ended value-added and closed-ended opportunistic funds, as compiled by the National Council of Real Estate Investment Fiduciaries and consultant The Townsend Group.

According to NAREIT’s results, listed real estate companies generated returns of up to 180 percent more than opportunistic vehicles over the last full real estate cycle which lasted roughly 17 years to late 2007, early 2008. Brad Case, vice president of research and industry, said the findings disproved the perception that closed-ended funds provided institutional investors with an illiquidity premium. “There’s an illiquidity penalty,” he said.

And with US LPs expected to commit up to $32 billion of new capital to commercial real estate in 2010 – including around $8 billion to opportunistic and value-added funds, according to an IREI, Kingsley Associates survey – there’s plenty at stake for REITs and private vehicles alike.

By the numbers: real estate performance

NAREIT is urging LPs to increase their allocations to public real estate saying – over the last full real estate cycle – REITs generated better returns than private vehicles, with the added benefit of being liquid investments as well.

Value-added funds

Total returns = 318%

Annual returns = 8.6%

Opportunity funds

Total returns = 621%

Annual returns =  12.1%

Public REITs

Total returns = 802%

Annual returns = 13.4%