Does private core real estate ownership generate lower return volatility than REITs? A cursory analysis of NCREIF data would suggest that this is the case, and that it has lower correlation with returns on stocks and bonds. But NCREIF’s use of appraised property values not only introduces an appraisal lag, but also introduces four sources of artificial return smoothing. These smoothing biases result in NCREIF reflecting “marketless,” rather than market, returns. When similar smoothing and lag are applied to REIT returns, and NCREIF returns are leveraged equivalently, the measured return volatilities of NCREIF and NAREIT are basically equal. Thus, we conclude that core real estate performs roughly the same whether publicly or privately owned.
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