Risk vs. return

NAREIT gives investors a chance to test allocations

National Association of Real Estate Investment Trusts is offering a new tool — the Real Estate Portfolio Optimizer — to help institutional investors test the risk and return profiles of different real estate portfolio structures.

Sliding bars allow investors to test various allocations to real estate investment trusts, core real estate, value-added funds and opportunistic funds. As the bars are manipulated, a bouncing ball of a pie chart demonstrates the risk/return profile of the chosen allocation.

In a white paper released Feb. 7, NAREIT concludes the optimized portfolio with the most upside potential is one that includes both REITs and opportunity funds.

“(However,) if you want to protect against the downside and avoid losses, the most efficient way to avoid losses is to have a blend of REITs and core real estate in your portfolio,” said Brad Case, Washington-based NAREIT's chief economist. ”Without REITs, there is more risk because of the lead-and-lag relationship between REITs and private real estate.”

REITs and real estate equity follow the same real estate cycle but at different times, he explained in an interview.

After analyzing returns over 67 rolling five-year periods since 1988, a portfolio of 50% core real estate funds, 30% REITs and 20% opportunity funds delivered 10% to 20% average annual returns in nearly 60% of five-year periods over the past 22 years, according to the paper. The analysis is based on the net total returns of the NCREIF Open-End Diversified Core Equity Funds, FTSE NAREIT Equity REIT and NCREIF/Townsend Fund indexes — measuring returns for both value-added and opportunistic funds.

The optimizer is available in P&I's Online Investment Tools at pionline.com/NAREIT2011.