Why did private REITs outperform public REITs by 41.3% in 2022?

Private REITs outperformed public REITs in a big way in 2022, and if you don’t know the differences between public and private REITs, check out this article.

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There are 2 reasons why private REITs outperformed public REITs more than usual, and one of those reasons may not favor investors.

Reason #1:

Public REITs are more exposed to stock market volatility than private REITs.

Despite the properties operating similarly and potentially even having similar returns, when the stock market sees decline, it’s more likely to bring public REITs with it than private REITs.

When a public REIT is performing well it’s valuation is still based on it’s stock price, which is based on consumer confidence. When confidence in public markets decreases, it can lead to sell-offs of public REIT shares, which negatively impacts values.

Private REITs are more shielded from these public market swings and because of that, their returns are tied exclusively to the performance of the properties in the REIT.

Reason #2:

Private REITs were able to deny investor liquidation requests.

This is typically seen as a downside to private REITs when compared to public REITs. Private REITs are significantly less liquid.

Public and Private REITs both saw record amounts of liquidations and liquidation requests in 2022, the difference was private REITs could (and did) deny many of those requests when public REITs are not able to deny the selling of their stock.

The private REITs ability to deny these requests and hold cash helped prop up their valuations and give them more cash on hand.

These 2 major differences in public and private REITs helped private REITs win big over public REITs in 2022, but we don’t anticipate this to continue. It’s likely we’ll start to see this gap close especially around 2H and both public and private REITs will start to see a normalized spread of returns.