Why active management matters for listed real estate

Why active management matters for listed real estate

Why active management matters for listed real estate

Jason A. Yablon

Head of Listed Real Estate

More by this author

Ji Zhang, CFA

Portfolio Manager, Global Real Estate

More by this author

15 minute read

February 2025

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Active managers of listed real estate funds have historically outperformed passive. We believe this is due to the inefficiency, diversity and complexity of listed real estate markets.

KEY TAKEAWAYS

  • Listed real estate has historically been fertile ground for active managers
    leveraging their information advantage to build a track record of outperforming passive.
  • Real estate stocks receive relatively limited analyst coverage, resulting in
    market inefficiencies that may advantage REIT specialists.
  • Listed real estate sector and country return disparities in any given year can be substantial, creating alpha opportunities for adept active investors.

Listed real estate has historically been fertile ground for active managers

Index investing reached a milestone in early 2024, with assets in passive investment vehicles surpassing those in actively managed strategies for the first time. On the surface, the appeal of index investing is compelling: Passive exchange-traded funds (ETFs) offer lower costs. And, in the case of broad-based equity categories, active managers frequently fail to consistently outperform their benchmarks. But cheaper is not always better, and not all markets are alike.

Real estate is one area of the equity market that lends itself to active management, and portfolio managers who commit time and resources to understanding property fundamentals, market trends and other factors that may affect performance can potentially spot pricing inefficiencies and rapidly implement plans to generate excess returns.

Compared with broader equity classes, we believe this advantage is reflected in the performance of active listed real estate funds relative to passive investment vehicles, even after fees. Active listed real estate funds have outperformed their passive counterparts across three-, five and ten-year periods (Exhibit 1). In contrast, active funds in certain popular categories, such as large-cap blend stocks, have not provided such consistent outperformance.

EXHIBIT 1
Active management is a winning strategy in the real estate category

(Average excess return and success rate for active vs. passive)

Active management is a winning strategy in the real estate category

Recently, the outperformance of active listed REIT funds vs. passive has been so pronounced that passive funds have only beaten the bottom quartile of active funds over rolling five-year periods—that is, even below-average active funds have outperformed passive funds (Exhibit 2).

EXHIBIT 2
75% of active real estate funds have outperformed passive in last five years

(Average rolling 5-year return by quartile)

75% of active real estate funds have outperformed passive in last five years

In our view, active outperformance is rooted in three distinctive qualities of the listed real estate market: 1) market inefficiency, 2) a diverse universe of securities with wide dispersion of returns across property types, and 3) an information advantage among specialist active managers.

REITs are under-analyzed compared with broad stocks

One reason that active management matters in listed real estate, we believe, is that markets are inefficient at valuing REITs. Notably, there are far fewer analysts covering REITs than there are for more efficient markets, such as broader stocks (Exhibit 3).

Less coverage and scrutiny make for inefficiencies that active listed real estate portfolio managers can potentially exploit. Critical metrics may be overlooked or not fully understood, resulting in larger disconnects between market expectations and fundamental value.

In the last three years, for example, close to 75% of REITs missed or beat consensus targets by more than 5%. Passive investments, by definition, are not positioned to navigate changing expectations and are unable to exploit these inefficiencies.

EXHIBIT 3
Markets are inefficient at pricing listed real estate fundamentals
Markets are inefficient at pricing listed real estate fundamentals

Capitalizing on distinctive sector characteristics

While the market often considers listed REITs a single asset class, it’s a collection of 17 subsectors that can behave quite differently.

Real estate sectors and companies tend to respond to market conditions depending on factors such as their lease durations, types of tenants, economic drivers and supply cycles. These differences have historically resulted in wide dispersion of sector returns in any given period (Exhibit 4).

More economically sensitive sectors with short lease terms, such as hotels and self-storage, can adjust rents relatively quickly to capture accelerating demand in a cyclical upswing. By contrast, longer-lease sectors such as net lease and health care have more defensive cash flows that may be more resilient during economic downturns.

2024 was a good example—there was a large difference in returns between the best-performing subsector (specialty REITs, 35.9%) and the worst-performing subsector (industrial, –17.8%). 2023 wasn’t far behind, with a return difference between the best and worst U.S. sectors of almost 38 percentage points. The return disparity in country performance was even greater.

We have observed that the difference in returns at the security level within each sector is often similar to the variance at the sector level. We believe this dispersion highlights the opportunities active managers have to enhance returns through both sector and stock selection globally.

EXHIBIT 4
Significant return dispersion across sectors and countries benefits active managers
Significant return dispersion across sectors and countries benefits active managers

As managers pursue value, the flexibility to invest in high-conviction ideas in non-U.S. markets can be advantageous. For instance, while international REITs overall have widely lagged U.S. real estate in recent years, there have been pockets of exceptionally strong performance (along with areas of sizable declines), such as U.K. self-storage in 2021 and China data centers in 2024.

The REIT specialist advantage

Over and above the average return advantage of active REIT strategies, some investment managers have demonstrated historical outperformance over their active peers. Specifically, funds with managers who specialize in REITs (defined as those who only manage REIT funds) tend to outperform funds with managers who are generalists (defined as those who manage REITs as well as other asset classes, such as infrastructure or utilities).

EXHIBIT 5
Specialist REIT portfolio managers have outperformed generalists

(Total returns)

Specialist REIT portfolio managers have outperformed generalists

While investments in passive ETFs can certainly make sense in some areas of the equity market, listed real estate has rewarded active management, with historical performance clearly favoring funds run by specialist real estate investors. Market inefficiencies and large return differences across countries and sectors present opportunities for managers with the right skills to unlock alpha.

ABOUT THE AUTHORS
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Jason A. Yablon, Executive Vice President, is Head of Listed Real Estate and a senior portfolio manager for listed real estate securities portfolios and oversees the research process for listed real estate securities.

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Ji Zhang, CFA, Senior Vice President, is a portfolio manager for global real estate portfolios.

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