(NEW YORK), Thursday, September 21, 2017 - A new white paper, Real Estate as an Investment for Individual Investors - Beyond the Primary Residence, has been published by The Defined Contribution Real Estate Council (DCREC), a leading advocacy group promoting the inclusion of direct commercial real estate and real estate securities as a way to improve define contribution (DC) retirement plan outcomes.
The paper examines a key issue for many investors: does home ownership alone provide sufficient exposure to real estate as an asset class? In addressing the question, the DCREC cites an analysis conducted by B. East for the 20-year period 1996-2016. In that study, East found that commercial real estate offered higher returns than home ownership, with REITs, as represented by the FTSE NAREIT All Equity Total Return Index, gaining an average of 11.23% annually for the period. Of that, about half (5.78% a year) was from rental income. Private real estate, as represented by the NCREIF Property Index (NPI), returned an average of 10.13% annually over the same time-period with 6.93% stemming from income.
Based on median house prices, East estimated a return to residential real estate of 3.47% per year over the 20-year period, all from capital gains, less than one-third of the total return earned on commercial real estate and just slightly above the rate of inflation (2.15% annually).
“For many investors, their home will always be their biggest investment,” said Greg Jenkins, Co-Chair of the Research & Content Committee at DCREC. “But based on the findings of this study, it’s clear that exposure to commercial real estate should be thought of separately. The returns are substantially higher, and the typical portfolio offers a much higher level of diversification, with investments across a range of geographies and property types.”
Jenkins noted that these factors are particularly important for DC plan sponsors and participants, who are generally looking at the performance of investment options over longer periods of time.
The benefits of real estate for DC plans are further supported by a 2014 study from DCREC, which found that an allocation of as little as 10 percent to a mix of listed and unlisted real estate could enhance the risk-return profile of a defined contribution plan portfolio, improving the probability of successfully achieving desired retirement outcomes.
“Home ownership can be beneficial for all kinds of reasons, but it doesn’t replace the role commercial real estate can play in a defined contribution plan,” Jenkins said.
About the Defined Contribution Real Estate Council (DCREC)
The Defined Contribution Real Estate Council was formed in 2012 to promote the inclusion of investments in direct commercial real estate and real estate securities, including REITs, within defined contribution plans. Its goal is to improve participant outcomes by furthering education about, advocacy for, and best practices of such investments.
Members include many of the leading providers of real estate investment products to the defined contribution marketplace. Total membership has grown from 10 to 27 firms since its launch.
More information can found be at www.dcrec.org.
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