LaSalle: REITs, private RE combine for higher returns

Listed real estate and its private counterpart can generate higher risk-adjusted returns than either strategy on its own, LaSalle Investment Management said in a whitepaper released this week.

“If investors haven’t considered securities, they absolutely should,” Steve Ralff, the firm’s managing director and author of the report, told PERE . “The specific factors they’ll get from exposure to securities, including a differentiated return stream and diversification – they won’t get elsewhere. It’s more than a liquid proxy to real estate.”

The firm does not have a blanket recommendation for REIT allocations, but generally advised that large institutions earmark 10-50 percent of their real estate allocations to the strategy, while smaller investors should allocate an even higher percentage.

The strategy should sit in investors’ real estate portfolios, rather than in equity, because the correlation between public real estate and public markets begins weakening at about 18 months after an initial investment and inverts at about three years, Ralff said.

“The specific factors they’ll get from exposure to securities, including a differentiated return stream and diversification – they won’t get elsewhere”

– Steve Ralff

When adding listed securities to a client’s portfolio, Ralff said his team examines the holes in an existing portfolio, including regional biases and property type exposure. LaSalle considers listed securities a core strategy, with long-term returns comparable to private core real estate. Particularly for smaller investors that cannot access specific strategies through funds, REITs can be an attractive way to gain exposure to the sectors where REITs have large market shares, including US regional malls, German residential and global self-storage.

With the exception of the UK, public real estate has outperformed unlevered private real estate after the global financial crisis in major global markets, including the US, Canada, Australia and Japan. That long-term performance, along with REITs’ current lower trading prices than last year, led one chief executive of an advisory firm to tell PERE this week that there is a “ripe opportunity” for investing in the strategy.

LaSalle manages an $11.7 billion securities portfolio and $59 billion total.