Public REITs vs. Private Real Estate Funds: What Investors Need to Know

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You can find true portfolio diversification through private real estate: a real alternative.

Investment involves risk - but diversification can help mitigate those risks. And following a grim 2022 on the public markets, in 2023, the case for portfolio diversification is stronger than ever.

But with assets listed on public markets increasingly correlated with one another, diversification is becoming harder and harder to find.

As we’ve written elsewhere, one of the most approachable sources of diversification is alternatives in real estate. But direct private ownership of real estate can present its own challenges, including illiquidity and property management requirements.

However, direct ownership is not the only option. Investors looking for exposure to real estate as an asset class, but are wary of illiquid and undiversified investments, may choose to invest in a Real Estate Investment Trust (REIT) or private real estate investment fund instead.

In this article, we’ll compare REITs and private real estate investment funds, including their benefits, drawbacks, and other considerations investors should keep in mind when making investment decisions. 

What is a REIT?

A REIT is a company that owns income-producing real estate. REITs can be found across sectors, with Canadian REITs offering exposure to residential, industrial and commercial real estate investment opportunities. This diverse slate of opportunities offers investors multiple options to find a REIT that fits their investment objectives - whether to secure the strong fundamentals and cash flow of a large, multi-family public REIT like Canadian Apartment Properties, or to benefit from industrial or commercial space instead.

Whatever sector they operate in, these REITs hold buildings in their portfolios - allowing for diversification. Their scale allows the investor to gain exposure to high-quality real estate assets that would be totally inaccessible through direct ownership. And, unlike direct ownership, they allow for liquidity on a much more frequent basis.

Public vs private real estate investment

Some REITs are publicly listed. There are also private REITs which are not listed on the public markets. Still other real estate investment opportunities are structured as private real estate investment funds. 

There are advantages and disadvantages to each option. Investors should choose the option that best suits their investment objectives.

Public REITs: Public REITs - that is, REITs which are listed on a public exchange - are very accessible. They can be accessed through any self-directed investment platform, or through an investment broker.

They also confer all the advantages discussed above. Canadian residential real estate has very strong fundamentals, and these fundamentals extend to Canadian REITs in the residential space. Because REITs hold real assets, investors benefit from capital appreciation. And tenants’ need to pay rent means predictable, and reliable, cash flow, irrespective of the direction of the public markets.

They also enjoy instant liquidity, like with any other publicly-listed security.

Despite these independent sources of value, however, public REITs remain positively correlated with publicly-listed securities. Investors who choose to invest in a public REIT enjoy enviable liquidity when compared to their private counterparts - and especially when compared to private real estate ownership. But in exchange, they accept correlation with the public markets - and the volatility that comes with it.

Private Real Estate Investment: Private real estate investment funds and private REITs, like their public counterparts, allow access to high-quality real estate investment opportunities. They also allow the investor to enjoy both capital appreciation and predictable cash flows. However, unlike their public cousins, private real estate funds are much less correlated with the public markets. This means that private real estate is a much better source of portfolio diversification - a true alternative.

There are additional advantages to private real estate investment. Due to its private structure, private funds are much more able to take an active hand in the management of their properties - not only acquiring and maintaining them, but actively repositioning and improving them, to improve their value and the returns they deliver to investors.

There are downsides to private funds. They tend to be less liquid than their public counterparts, though much more liquid than direct real estate ownership.

Like all private assets, they exist entirely separate from the public markets. They are therefore less accessible to investors - though they are still accessible to accredited investors, through Exempt Market Dealers like Parvis.

Equiton funds

We are proud to announce that we provide investors on our platform access to two Equiton funds: the Equiton Apartment Fund (the “Apartment Fund”) and the Equiton Income and Development Fund

Equiton Funds comparison

Both of these funds offer a very attractive risk-adjusted return - through acquisition and active management.

The Equiton Apartment Fund specializes in acquiring underperforming and undervalued multi-residential properties. 

Like any REIT, this fund will ensure that investors enjoy both capital appreciation and reliable cash flows. But active management confers an additional benefit: the fund’s capital is deployed to acquire underperforming apartment buildings and reposition them to create more value, and improve returns to the investor.

With 32 properties across 17 communities in Ontario and Alberta, the portfolio offers an attractive and diverse slate of investments, with a targeted annual net return of 8-12%.

The Equiton Income and Development Fund, conversely, provides access to a diverse portfolio of institutional grade real estate assets. Unlike the Apartment Fund, it is not strictly residential - it contains income-producing commercial and industrial properties, as well as development projects. 

Investors will be most immediately familiar with residential real estate - but commercial and industrial real estate also offers attractive fundamentals. Industrial real estate in particular is in extremely high demand in Canada’s biggest cities, with shortages in both Toronto and Vancouver.

Investors looking to invest in this fund will be able to diversify their risk across multiple asset classes, while still enjoying the benefits of active management - with capital actively deployed to reposition assets and enhance their value.

Both of these funds offer monthly liquidity - not the instant liquidity of the public markets, but an attractive alternative to direct private ownership. And with a minimum investment in the thousands of dollars, instead of the millions, they are accessible to accredited and eligible investors.

On May 2nd, we announced a co-agency agreement with Equiton, to distribute these funds on our platform - offering our investors access to these incredible opportunities

To access these funds, sign up to Parvis today.