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Despite these issues, the sector is sometimes marketed as a low-correlation or low-volatility asset class. This is not only a false statement but a concerning one because most often the underlying assets are not marked-to-market on a regular basis and if they are, the results are smoothed via appraisals.

Abraham Park, an associate professor of finance at Pepperdine University’s Graziadio School of Business and Management, provides a great illustration of this in the Graziadio Business Review:

“The existence of appraisal smoothing significantly reduces the usefulness of real estate rates of return series computed from unadjusted appraisal data, particularly because the variance measurement is artificially depressed,” he wrote. “This type of smoothed series underestimates the riskiness of the real estate asset class and also distorts its correlations with the rates of returns of other assets.”

As a result, while private real estate may provide the appearance of being less volatile than REITs, the only way to find out the real value of an asset is when you try and liquidate your position — and good luck doing so given most investments are locked in and often can’t be redeemed for at least five years.

From a return perspective, Cambridge Associates offers some interesting answers via a study comparing the returns of 942 private equity real estate funds versus publicly listed REITs.

It showed that over a 25 year period to the end of Q1 2017, REITs delivered an annual 11.1 per cent return — 3.9 per cent higher than the 7.2 per cent return of the private real estate funds. Interestingly, private equity real estate funds underperformed despite deploying an average leverage of 51 to 64 per cent compared to only 36 to 47 per cent for REITs. So they had a lower return despite deploying more leverage and therefore undertaking more risk.