Understanding the Trade‑Off: Private Real Estate and Public REITs
High-net-worth investors today face a fundamental question: should new capital flow into private real estate (direct investments, private equity real estate funds) or public real estate via REITs (Real Estate Investment Trusts)? Both have compelling merits — but they operate in very different risk‑reward regimes.
Private real estate, particularly through private equity or open-ended core funds, often provides lower volatility, less correlation with public markets, and a structural “illiquidity premium.” According to Ares Wealth Management, private real estate’s volatility has historically been far lower than that of listed REITs, with a Sharpe ratio of ~1.30 compared to ~0.53 for public REITs. Ares Wealth Management Solutions
Meanwhile, REITs (publicly traded) offer liquidity, real-time pricing, transparency, and the ability to trade in and out easily — but often come with higher short-term volatility.
This contrast in characteristics makes the decision especially important for marginal capital: do you want liquidity + potential higher return (but more risk), or stability + premium for illiquidity?
Recent Performance Trends: What 2025 Is Showing Us
Private Market Strength in Early 2025
Private markets have had a strong start to 2025. According to CRE Daily, in Q1 2025, private real assets (including real estate) posted ~0.6% gains, contributing to a broader rebound in private markets. CRE Daily
Further, Clarion Partners’ Q1 2025 private real estate dashboard shows modest but positive returns and improving private capital market health. Clarion Partners
Cap Rate Convergence and Valuation Dynamics
According to Partners Capital’s 2025 insights, private real estate and public REIT valuation spreads have narrowed meaningfully. Public REITs trade at a ~5.2% cap rate while private real estate is around ~5.4%, suggesting that the illiquidity premium has compressed. Partners Capital
Sector Strategy Divergence
There’s also a divergence in how private and public real estate is allocated across property types. Credaily reports that in 2025, open‑end private real estate funds (ODCE) are increasing their weight in industrial properties, while REITs are aggressively diversifying into data centers, specialty properties, and non-traditional real estate. CRE Daily
This allocation difference reflects differing risk‑return philosophies: private funds may favor stable core or value-add assets, while REITs are more nimble in capturing secular growth themes.
Risk-Adjusted Return: The Real Edge of Private Real Estate
One of the biggest arguments for private real estate is risk-adjusted return. Despite the common perception that publicly traded REITs always outperform, long-term data often tells a different story.
According to Primior Group, private real estate historically exhibits far less volatility than REITs: standard deviation in quarterly returns for private real estate sits around 6.1%, compared to 19.1% for REITs. Primior Asset Management
In addition, private real estate has historically benefited from an “illiquidity premium”: because capital is locked in, private real estate investors are compensated for taking on that lock-up. Primior estimates this premium at 2-4% for real assets.
Primior Asset Management
The CEM Benchmarking Study (via Nareit) further demonstrates how, over 25 years, REITs achieved average annual net returns of ~9.74%, while private real estate posted ~7.66%, but with slightly lower risk, meaning longer-term investors could justify private exposure for stability and diversification. Nareit
Strategic Considerations: Where to Allocate New Capital in 2025–2026
Given the data above, here are key strategic considerations for allocating marginal capital:
Diversification & Correlation Benefits
Private real estate tends to have low correlation with public markets, which helps in building resiliency. As Ares Wealth shows, the historical correlation between private real estate and public REITs is very low (~0.11), which makes private a powerful diversifier. Ares Wealth Management Solutions
Capital Lock‑In vs Liquidity
If your investment timeline is 5-10+ years, private real estate can be more attractive. But if you want easy liquidity, REITs provide that flexibility.
Expected Return Premium
Some private strategy returns may materialize from that illiquidity premium + value-add execution. According to Goldman Sachs, a modest allocation of ~12% to private real assets in a traditional 60/40 portfolio can “boost expected returns” by ~40 bps, without significantly increasing tracking error. Goldman Sachs Asset Management
Sector Exposure
If you're bullish on secular trends (like industrial or data centers), public REITs might let you play that growth faster. But if you're more focused on stable cash-flowing real estate (core, value-add), private funds may suit better — especially when private funds are increasing allocations to industrial under tight supply.
Valuation & Timing Risk
Given that cap-rate spreads between private and public real estate have narrowed, the “illiquidity premium” may be under pressure. Investors should be cautious of overpaying in private funds, especially in a rising-rate environment.
Drawbacks & Risks of Each Side
Private Real Estate:
Illiquidity: capital is often locked up for years.
Valuation lag: appraised valuations (in private) can lag market changes.
Higher fees: private funds often charge higher management and performance fees.
Public REITs: Market volatility: more exposed to broader equity market moves.
Yield compression risk: if rates fall, REITs may compress less, or if rates rise, dividend risk may increase.
Less control: as a public investor, you can’t directly influence property-level decisions.
Conclusion: Which Side Should You Lean Into, And How Real Estate Alpha Helps
For high-net-worth investors, allocating new capital between private real estate and REITs is not about picking a winner, but about striking the right balance:
Use private real estate to lock in long-term cash flow, capture illiquidity premiums, and diversify away from public market cycles.
Use public REITs when liquidity, tactical sectors (e.g., data centers), or rapid deployment matter.
Stay alert: valuation spreads are narrowing, and private real estate may not always command a large premium over public assets.
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