In today’s volatile market, private investment has fundamental benefits over REITs

In a typical investment portfolio consisting of corporate bonds, common stocks and government securities, real estate investment can offer an element of diversification. Investors can decide to invest through either the private or public markets, and both options have their strengths. However, CONTI Capital holds that private commercial real estate investment funds can be of particular value during times of economic volatility.

The public market for commercial real estate
A REIT, or a Real Estate Investment Trust, is a passive entity that acts like a mutual fund, allowing investors to acquire a stake in income-producing property portfolios. REITs get favorable tax treatment, and they are more liquid than private real estate investments.

On the other hand, REIT portfolios face many legal limitations on how the underlying properties are acquired, sold, operated and managed. Most significantly, because REITs share trade in public markets, the value of the investment can fall or rise in line with the broader stock market. In the midst of a choppy stock market like we’ve seen recently, REITs are more unpredictable than private investment.

Furthermore, the value of the REIT is not tied only to the underlying properties, but also to the strength of the business operations, which can be impacted by factors unrelated to the supply and demand fundamentals driving the broader real estate market.

The private market for commercial real estate
Direct, private equity investments in CRE provide many of the same benefits of REIT investments including strong returns, price appreciation, portfolio diversification and tax benefits. Additionally, the private market gives investors more control over the underlying real estate and fewer limitations on acquisitions, dispositions, management and operations.

Compared to REITs, private CRE investment returns have a lower correlation with the stock market and are therefore generally less volatile; they also have a higher correlation with inflation and are better able to pass price increases onto tenants. These strengths are particularly relevant in today’s macro environment.

CONTI’s stance
There is room for both public and private real estate investment within a well-diversified investment portfolio. CONTI continues to be bullish on the private side of commercial real estate investing because of the greater control owners can exert on the investments they manage, especially during periods of stock market volatility and macroeconomic uncertainty.