Publicly traded real estate investments have provided a better investment return premium compared to private equity real estate funds over a range of holding periods, including over the last full real estate cycle, according to new Morningstar report.

Based upon 20-plus years of performance data, Morningstar's report stated that publicly traded REITs have outperformed core, value-added and opportunistic private equity real estate funds over the long term, have experienced stronger bull markets, and have recovered faster from downturns.

The report, entitled "Commercial Real Estate Investment: REITs and Private Equity Real Estate Funds,"was commissioned by the National Association of Real Estate Investment Trusts (Nareit) and released today.

The report supports the case for pension funds and other institutional investors increasing allocations to publicly traded equity REITs, Nareit officials said.

"The Morningstar research underscores the strength of the REIT business model in delivering sustainable returns and the need to have a well balanced allocation between REITs and private equity in real estate portfolios," said Steven A. Wechsler, president and CEO of Nareit. "This is increasingly important as public pension funds and other institutional investors seek to both increase portfolio returns and reduce portfolio risk."

In addition to the performance comparison, the research also highlights the public market attributes of REITs that benefit an investment portfolio: increased liquidity, transparency and lower fees and expenses on average.

From 1989 to 2009, publicly REITs delivered compound annual net total returns of 9.3% compared to 4.4% for private equity core funds, 3.7% for value-added funds and 6.1% for opportunistic funds, according to the report. During the same period, the report stated, publicly traded REIT fees and expenses averaged one-half to one-fourth of those charged by private equity real estate funds.

Over the course of the last full real estate cycle, from January 1989 to March 2007, REITs produced a cumulative net total return of 801%, or 13.4 % on an annualized basis, higher than the performance of core funds (272% or 7.6% annualized), value added funds (320% or 8.5%) and opportunistic funds (617% or 12.0%), according to the report.

As of September 30, 2010, REITs also operated with less leverage than value-added and opportunistic funds, according to the report, which noted higher leverage can mean more volatility that isn't compensated by higher returns. Core funds had the lowest leverage, but also the lowest returns over the full real estate cycle, according to Morningstar.

-Jim McConville