GLOBAL - A blended real estate portfolio that combines REITs and private equity real estate with core holdings outperformed portfolios that contained either REITs or private equity real estate funds alone, according to a study by the National Association of Real Estate Investment Trusts (NAREIT).

NAREIT used data from NCREIF, including the NPI, ODCE and Townsend Fund indices, as well as the FTSE NAREIT Equity REITs index to compare the performance of REITS with direct property, core equity funds and value-added and opportunistic private equity real estate funds over a full market cycle (from peak to peak, 17 years from the beginning of the 1990s to 2008-09) and for the bull market only (15 years).

The study found that REITs offered the highest returns over that period, for the lowest fees and expenses.

Despite REITs' superior performance, NAREIT said it was focusing its attention on the strength of a blended real estate portfolio, including REITs as well as private equity and direct holdings.

Mike Grupe, senior vice-president of research and investor outreach at NAREIT, said: "You don't go with all equities just because it has the highest return - same with REITs."

NAREIT also analysed fund returns over 67 overlapping five-year holding periods since 1988 and created sample portfolios with varying percentage allocations of REITS and various profiles of private equity real estate funds.

Its research found that a blended portfolio of 50% core, 30% REITs and 20% opportunistic investment provided the best returns. In addition, such a portfolio never experienced negative net returns.

A blended real estate portfolio also has the advantage of the fact that asset valuations change at different times in public and private markets.

Grupe said: "Public holdings respond to the market immediately, whereas on the direct side, the process of revaluation is much slower," said Grupe.

As a result, equity REITs have a low correlation to the NCREIF Property index.

"REITs may have had the highest return, but their correlations and volatility are different," Grupe said. "They are a good way to complement direct investment."

NAREIT is looking at ways pension funds can incorporate REITs into their real estate portfolios.

Currently, in aggregate, pension funds have a total allocation to REITs of only around 5%.