.svg){kind=icon}
How Private Real Estate Has Performed Alongside Stocks and Bonds
Important information: This material is informational and is not a recommendation. Private real estate, including DSTs, REITs, and private funds, is speculative and illiquid, involves fees that reduce returns, and can result in a complete loss of principal. Certain products are available only to accredited investors. Historical and hypothetical figures are not indicative of future results. Additional disclosures appear at the end of this article.
A portfolio built around stocks and bonds may not be the only way to spread investment risk. Private real estate is another asset class investors sometimes consider. ExchangeRight’s overview looks at how adding private real estate to a traditional 60% stock and 40% bond portfolio would have affected returns and volatility from 2013 through 2022.
Using historical data from 2013 through 2022, the comparison showed an annual return of 8.67% for the 60/40 portfolio. Adding a 10% allocation to private real estate brought the historical return to 8.82%. With a 25% allocation, the return was 9.36%. The same comparison showed volatility declining from 11.02% for the traditional portfolio to 10.12% with 10% private real estate, and 9.11% with a 25% allocation.
These figures describe a specific historical period and set of indexes. They don’t show what a similar portfolio will earn in the future. The document uses the S&P 500 for stocks, the Bloomberg U.S. Aggregate Bond Index for bonds, and the NCREIF Fund Index for private real estate. Results can differ based on the investments used, the allocation, fees, and the period measured.
What volatility means
Volatility is the degree to which investment returns move up and down. The document also uses the Sharpe ratio, a measure that compares returns with the amount of volatility taken to achieve them. In its 2013–2022 comparison, the Sharpe ratio increased from 0.592 for the traditional 60/40 portfolio to 0.659 with 10% private real estate and 0.791 with 25%. A higher ratio indicates that returns were higher relative to the volatility measured during that period. Note: Because appraisal-based volatility tends to be understated, these ratios may overstate the risk-adjusted benefit of private real estate.
Private real estate may also provide income as part of an investment’s total return. That income can play a role in a portfolio, though it is not guaranteed. Private real estate investments are generally illiquid, and their values and income can be affected by property markets, financing costs, leasing, and management.
The document also compares asset classes over a longer period, from 2003 through 2022. It reports that private real estate lost value during the Great Recession, but its worst annual decline in that period was 17%, compared with a 37% maximum one-year drawdown for the S&P 500. Note: Appraisal-based indexes tend to smooth declines, so the reported drawdown for private real estate may understate the loss an investor could have experienced, particularly one who needed to sell. That is a historical comparison, not a measure of how either asset class will perform in a future downturn.
For investors, the practical question is how different investments fit together, including their risks, time horizon, income needs, and access to cash. If you’d like to discuss how real estate fits into your broader financial plan, contact Verus Financial Group to schedule a review with your advisor. Any recommendation will depend on your individual circumstances, including your objectives, liquidity needs, tax situation, and existing real estate exposure.
The information presented in this article is provided for educational purposes only. The article includes a discussion of Delaware Statutory Trusts ("DSTs") and other real estate-related investment structures with ExchangeRight. The information presented does not constitute an offer to sell, or a solicitation of an offer to buy, any security, including any DST interest. DST interests are securities offered only pursuant to a Private Placement Memorandum to accredited investors and are subject to significant limitations. DSTs are not suitable for all investors and involve a substantial degree of risk. The article includes hypothetical, back-tested illustrations, not the performance of any actual portfolio or investment. Verus Financial Group is not affiliated with and does not receive compensation from ExchangeRight in connection with the material presented here. Advisory services are offered through Verus Financial Group, an investment adviser registered with the U.S. Securities and Exchange Commission.
.svg)
