An Introduction to Public Real Estate
If you’re considering investing in real estate, you’re probably wondering how to invest. Realistically, you have two options: private real estate, which involves investing in deals not listed on the public market (ranging from direct purchases to private REITs), and public real estate.
You may find public real estate interesting for a couple of reasons:
- It offers better liquidity than other types of private real estate investments.
- It can be a good way to diversify your portfolio and receive income.
The following is an introduction to public real estate — what it is, how it works, and why you might consider investing.
What types of public real estate can I invest in?
To start, we should define what it means to invest in public real estate: what are you actually buying? At the very highest level, as there are two main categories of public investments or securities:
- Public REITs. Real Estate Investment Trusts are traded on the major stock exchanges. They own and operate real estate with the goal of producing income. They have a number of rules and regulations, one being that they are required to distribute at least 90 percent of their taxable income to shareholders. You can also invest in REIT ETFs or mutual funds, which gets you exposure to a broader number of REITs than if you had just purchased shares in a single REIT.
- Public real estate companies that are not REITs. Not all real estate companies are REITs. Some companies, called REOCs (Real Estate Operating Companies), invest in real estate but don’t have the income distribution requirement that REITs do. And there are plenty of other companies (for example, construction companies) that may have financial dealings in real estate but are not public REITs.
In this piece, we’ll focus on public REITs. They’re the most common type of public real estate investment your financial advisor will most likely have you make. There are two broad ways REITs are different than many other investment types:
- They produce consistent income.
- They are an asset class with a lower correlation to equities, which helps diversify your portfolio.
It’s worth elaborating further on just why public real estate isn’t as correlated with the equity markets as other types of investments are.
Why does public real estate have a low correlation to equities?
There are a few reasons:
- The obvious answer is that public real estate investments are, naturally, linked to physical real estate — which, generally, has a lower correlation with equities.
- Another reason is that REITs generate a significant amount of income relative to other types of equities, which can make it more stable.
- Real estate also tends to be more sensitive to interest rates: because they rely heavily on debt, higher interest rates can hurt their performance. And from an investing perspective, REITs’ high yield of income also makes them more sensitive to interest rates — higher rates making the yield less attractive, because it can be easy to get similar yield elsewhere.
Because of all the above (and other, complex factors), REITs tend to have their best performance at different points of the economic cycle than other types of public equities.
Below, we’ll go into more detail on the types of public REITs you can own.
The different types of public REITs
When you invest in public REITs, what are you actually investing in?
To expand on the definition in the previous section, there are two different types of public REITs:
- Equity REITs: Own and operate income-generating real estate properties. We’ll spend our time here talking about Equity REITs, specifically, given they’re the most common.
- Mortgage REITs: Invest in and own real estate mortgages. They provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities.
Another qualification of a public REIT is that 75% or more of their assets must be in real estate. That’s the basic definition.
But different REITs buy different types of properties and offer you exposure to different parts of the market. As a general rule, public REITs focus more on commercial real estate. This is different from the type of exposure most people have to real estate, which is residential exposure. Public REITs invest, usually, in properties like:
- Data centers
- Retail locations
… and many more. It’s important to note that, because many REITs may be concentrated in a specific part of the real estate market, you have options as to what types of investments you want to make.
For example, if you’re feeling bearish about the state of office space in San Francisco, you can avoid purchasing REITs with that specific exposure. On the flip side, if there’s a certain part of the market that you or your financial advisor feel particularly optimistic about, then you can look at investing in REITs that focus on those parts of the market.
Why would you want to invest in public real estate?
What’s the benefit of investing in public real estate? Why wouldn’t you just put all your money into private investments, where people often tout better returns? Here are a few reasons that your financial advisor may recommend getting exposure to public REITs:
- They’re often higher-quality and lower-risk than other types of funds. Public REITs tend to choose from a more limited pool of high-quality assets, which can be attractive to investors that favor a decent yield with possibly lower risk than in other types of real estate investing. Plus, public REITs are subject to more stringent regulatory requirements. This scrutiny can lead to a more transparent investment process. In contrast, private investments often lack this level of oversight.
- They’re the only main type of real estate investing that offers significant short-term liquidity. While public REITs have similar underlying risks to private REITs, they give you more liquidity — you can trade them on exchanges like you would stock in a company.
What about risks and drawbacks?
Compared to non-public forms of real estate investing, it’s important to note public REITs may have lower yields and returns. As they are traded on public stock exchanges, public REITs can exhibit a higher correlation to the equity markets compared to non-public real estate investing options, although still generally lower than other public asset classes.
Public REITs have different diversification benefits as compared to direct investing or in certain private funds and private REITs. As real estate portfolios are typically made up of properties in specific locations, types, or sectors, depending on the investment, there are different degrees of concentration risk.
Of course, like any other investment or asset class, real estate markets can be subject to economic downturns and changes in local conditions that lead to declines in property values and rental income. It’s crucial to understand the potential impacts that market conditions have on public real estate investments in your portfolio. Public REITs are also impacted by inflation and interest rate movements, as all real estate investments are. Higher interest rates can increase borrowing costs and affect property valuations. It’s important to consider risks like these when thinking about diversifying your portfolio with real estate exposure, especially considering this current point in the economic cycle.
The bottom line
Investing in publicly-traded real estate investments, like REITs, can be a useful way to get exposure to real estate. Talk with your financial advisor about your goals and they’ll help you figure out how much of your allocation, if any, should be dedicated to publicly-traded real estate investments.
If you’re interested in understanding your options to invest, you may benefit from a conversation with Compound. We help people in tech — at companies like Stripe, Discord, and OpenAI — make smart decisions about their money. Schedule an intro call here.
Disclaimer: Compound Advisers, Inc. ("Compound") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). An adviser’s status does not represent any endorsement of the SEC or any expertise simply by having the status as a registered investment adviser.
This content is provided for informational purposes only and should not be construed as financial or investment advice. The information presented in this piece is based on historical data and current market conditions as of the date of writing, which may change without notice. Investing in real estate, whether public or private, involves inherent risks, and individuals should carefully consider their own financial situation and consult with a qualified investment advisor before making any investment decisions.
This educational piece does not constitute an offer or solicitation to buy or sell any securities or investments. The content should not be relied upon as the sole basis for investment decisions and does not take into account the specific objectives, financial situation, or risk tolerance of any individual.
The performance of real estate investments, including public REITs, is subject to various factors such as economic conditions, interest rates, market volatility, and tenant occupancy. Past performance is not indicative of future results. The information provided in this piece is believed to be reliable, but no representation or warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness.
Investors should be aware that investing in public real estate, including public REITs, involves risks, including but not limited to market fluctuations, illiquidity, concentration risk, regulatory changes, and property management challenges. There is no guarantee of investment returns, and the value of investments may fluctuate. Investors may lose some or all of their investment. Additionally, investing in public REITs may have different diversification benefits and correlation characteristics compared to other forms of real estate investing.
Individuals considering investing in real estate should conduct thorough research, carefully review the prospectus or offering documents, and consult with their financial advisor to assess the suitability of any investment based on their individual circumstances and investment objectives.
This content serves as an introduction to public real estate investing and should not be considered as a comprehensive guide. Investors are encouraged to seek professional advice and perform due diligence before making any investment decisions.