We have posted previously about how non-traded REITs which have had “liquidity events” have destroyed $27.7 billion in investor wealth compared to traded REITS. The posts are available here. In this post, we calculate that the 27 non-traded REITs we discussed in prior posts have an internal rate of return (IRR) of 4.82%, which is 5.62 percentage points lower than the 10.44% IRR of a liquid, diversified REIT mutual fund over the same time period, with the same cash flows.
To calculate the IRR of the 27 non-traded REITs, we combine all of investors’ cash flows for the 27 non-traded REITs into a single stream of cash flows from June 1990 to October 2013. When one of the non-traded REITs has a liquidity event, we treat the market value of the REIT as a cash flow returned to investors. The IRR on the 27 non-traded REITs is 4.82%.We applied the same non-traded REIT cash flow stream to a diversified, liquid portfolio of REITs (the VGSIX), and found that the VGSIX had an IRR of 10.44%.* In other words, investors in a liquid, diversified portfolio that exposes them to the same underlying real estate market as the non-traded REITs received 10.44% per year for the risk. In sum, even the winners amongst non-traded REITs have not compensated investors enough for the risks involved in investing in real estate.
* The VGSIX began on May 13, 1996. Prior to that, we use the NAREIT index, a non-tradable REIT index.