#private real estate
How are these markets related in terms of risk and return?
Investors should be aware that the indices tracking the returns of publicly traded real estate companies (public real estate) and private commercial real estate cannot be compared at face value. First, the private commercial real estate return indices suffer from artificial smoothing effects of infrequent, appraisal-based valuation data, and second, the public real estate returns include the effects of leveraging used by real estate companies. Although the underlying values of the properties are similar. For these reasons and more, the private and public real estate returns/risk characteristics are dissimilar.
Global Real Estate Equity Market
Within the last decade, the global real estate market has come a long way. The increase of capital flows into the real estate sector, the growth in variety and number of investment vehicles, and the increased recognition among institutional investors of the potential for real estate within a multi-asset portfolio have contributed to the worldwide expansion of both the private commercial real estate equity market and public real estate equity market (publicly traded property companies).
The size of the global investable universe of private commercial real estate equity market has grown from approximately USD $6.2 trillion at the end of 2003 to more than USD $8.0 trillion in 2006,  with the U.S. Japan, and UK markets making up approximately half of the investable universe.
The growth of the public real estate equity market has been even more dramatic.
The total market capitalization of the FTSE EPRA/NAREIT global listed real estate index (composed of 300-plus publicly traded real estate companies around the world) more than tripled within the last six years, with the total market capitalization at the end of 2007 reaching approximately $800 billion.
Public Real Estate Total Market Capitalization 
During 2007, the total market capitalization of publicly listed real estate around the world fell significantly from their tops due to a combination of market factors: rising interest rates, mergers and acquisitions of public REITs, concerns of an economic slowdown, and the U.S. subprime mortgage crisis (Read Dr. Park s explanation of the causes of the sub-prime mortgage meltdown here ). After a seven-year stretch of market-leading performance, the real estate market as a whole is currently undergoing a correction period.
Real Estate Investment Trusts
In an effort to give small investors access to real estate investments that traditionally were available only to institutions or wealthy individuals, the U.S. Congress passed the REITs Act in 1960, allowing for the creation of Real Estate Investment Trusts (REITs). A REIT is a special corporate organizational form, under the tax laws, for companies that own and operate income-producing real estate. The benefits of the REIT organizational form for investors include liquidity, limited liability, and professional management, while avoiding taxation at the corporate level (similar to mutual funds for stock investors). In order for a company to qualify as a REIT in the United States, it must comply with the requirements of Internal Revenue Code § 856 . Among other things, a REIT must invest at least 75 percent of its total assets in real estate, derive at least 75 percent of its gross income as rents from real property, and distribute at least 90 percent of its taxable income to shareholders in the form of dividends. Because REITs must pay out almost all of their taxable income to shareholders, they generally provide reliable and significant dividends for investors. Currently, there are about 170 REIT companies trading on the major U.S. stock exchanges.
On a global basis, not only has the market capitalization of the publicly traded real estate grown, the number of countries adopting REIT structures has also increased significantly. Although listed real estate does not have to be in the form of an REIT, the trend reflects investors preferences for REIT-like vehicles, evidenced by the increased market capitalizations in countries where REIT structures already exist. The U.S. REIT experience has shown the potential benefits of including public real estate equity assets in a mixed-asset portfolio: enhanced returns, lower trading costs compared to direct real estate investment, liquidity, accessibility, and diversification. These lessons have spurred other countries, including the UK and Germany, to adopt REIT-like legislations.
Countries Adopting REIT Regimes