Which Real Estate Funds Provide The Best Returns? The Patriots

When looking to put their money into a real estate fund, which type should investors choose? A new academic study would suggest the safest bet is to pick one that only invests in a single country.

A paper from a group of Cambridge University academics found funds that invested in a single country on average outperformed those that invested in multiple countries. It didn’t matter if those cross-border funds were diversified or invested in a specific sector — it was still better to invest in a country-specific fund.

If you are investing in a single country, however, it was better to be sector-specific; the best type of fund to pick was one that invested in a single sector in a single country. The results confirm the age-old adage that real estate is a sector where you need boots on the ground.

There was one caveat to the findings: In the period of extreme volatility between 2007 and 2009, country-specific funds underperformed because they were so exposed to the problems of a single region, with no potential safe haven to help improve returns. 

The results may come as something of a surprise. The firms cited in most of the headlines and attracting most of the capital, like Blackstone, Brookfield, Starwood or Lone Star, all invest money only through cross-border funds. 

It is worth pointing out the paper analysed average performance. Some funds will perform better than the average, some worse. 

The study looked at the performance of 592 funds investing in Europe between 2001 and 2019. It adjusted for factors like leverage, so the amount of debt a fund carried did not amplify the returns the fund made.

The paper was written by Franz Fuerst, Nick Mansley and Zilong Wang.