US private real estate has provided competitive long-term returns compared to stocks and bonds.
The average income has been stronger in US private real estate than US bonds or stocks over the past 20 years.
Private real estate can be a diversifier and inflation hedge, have potential tax benefits, and provide exposure to private markets.
Institutional investors have long understood the merits of real estate, typically devoting 10% of their portfolio value to real estate.1 Individual investors only have 3% or less of their portfolios in real estate.2 They may be missing out on some of the potential benefits of including a real estate allocation within a stock and bond portfolio. Here are six.
US private real estate has provided competitive total return potential compared to the return on US equities and bonds and Treasury yields over a long-term period. For the past 20 successive 10-year rolling periods of quarterly annualized returns going back to the mid-1990s, total returns for US private real estate, measured by the unlevered NCREIF Property Index (NPI), were the highest or next-highest compared to returns for US stocks, US bonds, and the average yield of the 3-month US Treasury bill. (See chart below.)
Over the past 30 years, US private real estate’s historical risk-adjusted returns have been closer to US stocks than US bonds but the volatility of its returns (i.e., the standard deviation of annual total returns over time) have been closer to US bonds than to US stocks.
A key investing rule of thumb is diversification — including a variety of investments that don’t move in lockstep in a portfolio. One way to measure the diversification potential of an investment is to look at its correlation. Over the past 30 years, US private real estate has historically shown low correlation to US stocks (0.06) and US bonds (-0.11), which means it had provided greater portfolio diversification.4
As an alternative to US stocks ($62 trillion market capitalization at year-end 20245) and bonds ($63 trillion6), private real estate ($18 trillion7) provides meaningful exposure potential to private markets.
Inflation can erode the purchasing power of income from stock dividends or bonds. The income generated by private real estate is different — it’s tied to rents, which historically have increased when inflation has risen (see chart below). Real estate income growth has historically kept pace with inflation over the long term.
Investing in private real estate may provide durable income. Over the past 20 years, average income returns have been stronger in US private real estate (5.22%) than in US bonds (4.13%) or stocks (1.94%).8
Investing in real estate may provide tax benefits.9 For example, real estate investment trusts (REITs) can offer:
Investors may benefit from a REITS’ ability to deduct certain expenses, such as mortgage interest, property repairs, and depreciation.
REITs may realize any profits from a property sale as a capital gain, and the tax rates are typically lower than ordinary income tax rates.10
REITs aren’t subject to corporate income tax on earnings distributed to investors, and dividends are taxed at an investor’s individual tax rates.11 Tax reporting is also more straightforward on a 1099-DIV (no K-1s).
Real estate can be owned through other structures besides REITs, so before investing in real estate consult a tax professional about ownership options.
The track record of US private real estate offers compelling reasons to consider an allocation to it in a portfolio with only US stocks and bonds. Of course, real estate investing, as with all investing, isn’t risk-free and past performance isn’t a guarantee of future results.
Global demographic shifts, like a declining, growing, or an aging population, in tandem with macroeconomic factors tend to generate real estate investment opportunities.
To determine what current pricing, expected fundamentals, and capital spending mean for future returns, the long view on real estate cap rates provides perspective.
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All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
US private real estate is represented by the NCREIF Property Index on the basis that the NPI is the broadest measure of private real estate index returns. The NPI is published by the National Council of Real Estate Investment Fiduciaries and is a quarterly, composite total return (based on appraisal values) for private commercial real estate properties held for investment purposes including fund expenses but excluding leverage and management and advisory fees. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors and held in a fiduciary environment. NCREIF data reflects the returns of a blended portfolio of institutional quality real estate and does not reflect the use of leverage or the impact of management and advisory fees.
US stocks are represented by the S&P 500 Index, an unmanaged index of the 500 largest stocks, weighted by market capitalization and considered representative of the broader stock market. The S&P 500 Index is subject to market risk.
US bonds are represented by the Bloomberg US Aggregate Bond Index, an index of securities that covers the US investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and assetbacked securities; and is subject to credit risk.
US Treasury or T-bills are represented by the Bloomberg 90-Day US. Treasury Bill Index, an unmanaged index designed to measure the performance of public obligations of the US Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months.
The S&P 500 Index, the Bloomberg US Aggregate Bond Index, and the Bloomberg 90-Day US. Treasury Bill Index are meant to illustrate general market performance; it is not possible to invest directly in an index.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Property and land can be difficult to sell, so investors may not be able to sell such investments when they want to. The value of property is generally a matter of an independent valuer's opinion and may not be realised.
Generally, real estate assets are illiquid in nature. Although certain kinds of investments are expected to generate current income, the return of capital and the realization of gains, if any, from an investment will often occur upon the partial or complete disposition of such investment.
Investing in real estate typically involves a moderate to high degree of risk. The possibility of partial or total loss of capital will exist.
Investing in commercial real estate assets involves certain risks, including but not limited to: tenants' inability to pay rent; increases in interest rates and lack of availability of financing; tenant turnover and vacancies; and changes in supply of or demand for similar property types in a given market.
Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation. The tax information presented is based on the current interpretation of federal income tax law. State and local income tax laws may differ from federal income tax law.
The opinions referenced above are those of the author as of July 1, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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