The Case for Private Real Estate Investments January 8, 2017

by Jay Madary, President and CEO

It’s commonly held wisdom that commercial real estate should be an important part of a well-diversified investment portfolio. Income-producing assets like apartment communities can offer investors several benefits, including a steady cash flow and a hedge against inflation.

For institutional investors and high net worth individuals looking to invest in multifamily and other commercial properties, the two primary methods of doing so are real estate investment trusts (REITs), most of which are publicly traded, and private equity real estate funds, such as the ones offered by JVM.

Publicly traded REITs have become popular investments since their debut in the 1960s, and proponents will cite a number of reasons why: regular dividends, liquidity and their transparent reporting.

But private equity real estate funds offer many of the same benefits and additional ones, such as less volatility in value. In short, well-managed private funds, like the ones created by JVM, are often a better investment for institutional investors and high net worth individuals.

Talking Returns

Both REITs and private equity real estate funds can offer strong returns. The FTSE NAREIT All Equity REITs index produced total returns of 12.31 percent in the first nine months of 2016. But, over the last three months, according to numbers released as of Nov. 30, the index was down 8.8 percent, and over the last six months it was down 2.2 percent.

Private funds, as measured by the NCREIF Fund Index—Open-End Diversified Core Equity Index, produced total returns of 10.1 percent in the year concluding at the end of the third quarter and 6.0 percent in the decade ending on that date. The index has not experienced the declines that the public indexes are experiencing.

Numerous Benefits

When considering REITs versus private funds, it’s important to consider the benefits conferred by the latter. For instance, private funds can be a lot less volatile than REITs.

In a blog post on his company’s site, Origin Investments Principal Michael Episcope notes that, unlike REITs, the value of private equity real estate funds isn’t subject to the whims of the stock market.

“While public real estate products can be lucrative investments, they are highly correlated to the stock market,” Episcope writes. “That means they rise and fall based on what’s happening in the economy, and their values can be impacted by events that have nothing to do with real estate fundamentals.”

According to the Wall Street Journal, “When REITs do poorly, they really crater. Since 2000, they are second only to emerging-market stocks as the most volatile asset class. With interest rates likely to rise, the next few years could be tough, especially for fund managers who start buying REITs now.”

In 2007 and 2008, in the midst of the collapsing economy, REIT stocks lost 15.7 percent and 37.7 percent, respectively, the Wall Street Journal reports.  At JVM, we’ve heard from some private investors that they finally grew weary of listening to the news, for fear of hearing bad reports about the Dow and having to mentally calculate how much money they’d “lost” that day.

Secondly, while many investors believe the transparent reporting structure required of public REITs is exclusive to publicly traded offerings, many private funds also make sure their investors are thoroughly informed and always in the loop about the performance of their investments.

JVM’s investors have 24/7 online access to detailed monthly, quarterly and annual reporting tools about the funds in which they are invested – including annual fund audit reports.  With our nimble and responsive leadership structure, reaching our Investor Relations team is easy.

Additionally, private funds can simply offer better management of assets than REITs and thus produce more significant returns. In many private funds, as is the case with JVM’s, general partners are substantial co-investors in the funds. At JVM, senior managers invest side by side with our investors, and this fact, along with our multifamily expertise and experience, contributes to consistent and robust returns for our investors.

Finally, unlike many public REITs that focus on core markets, JVM’s funds give institutions and high net worth individuals the opportunity to invest their money into more affordable secondary and tertiary Midwest markets that appear poised for continued rent growth at a time when rents may be leveling off in larger markets.