Fresno County Employees’ Retirement AssociationPrivate vs. Public Real Estate InvestingJanuary 4, 2005

SEATTLE999 Third AvenueSuite 3650Seattle, Washington 98104206.622.3700 telephone

206.622.0548 facsimile

LOS ANGELES2321 Rosecrans AvenueSuite 2250El Segundo, California 90245310.297.1777 telephone310.297.0878 facsimile

Jeffrey MacLeanPresident

www.wurts.com

PAGE 2WURTS & ASSOCIATES

Contents

Private vs. Public Real Estate Investing:

Why Real Estate?

Types of Real Estate Investments: Public – Real Estate Investment Trust Private – Commingled Funds/Limited Partnerships/Separate Accounts Public or private?

Private vs. Public Real Estate

Developing a Real Estate Strategy

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Why Real Estate?

Real estate makes up approximately 20% of domestically invested assets $5.6 trillion in value (U.S. commercial real estate) as of 9/30/05 Can be accessed through a range of available investment approaches

Low correlation to stocks and bonds leads to higher diversification benefits

Historically proven to be a good hedge against inflation Construction costs typically rise in an inflationary environment Rental income increases with inflation

High current income A large portion of real estate returns is the stable income component

Source: JP Morgan Asset Management

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Types of Real Estate Investments

In general, there are two types of real estate markets:

I. Public real estate market Real Estate Investment Trusts (REITs) Real Estate Operating Companies (REOCs)

II. Private real estate market Direct Separate Accounts, Joint Ventures/Partnerships Commingled Funds Operating Companies

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Types of Real Estate Investments

Risk

Return Opportunistic – Total Return (20% or higher)

Value Added – Total Return (12% - 16%)

Publicly-Traded REIT – Total Return (9%-11%)

Core – Total Return (7% - 9%)

Real estate investment portfolios can be categorized in four different styles which varies in leverage usage and return objectives:

Core Publicly Traded REITs Value-Added Opportunistic

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Public Real Estate Real Estate Investment Trusts

Advantages

Greater liquidity – Trade on a major exchange on a daily basis

Daily pricing – Priced or valuation varies as investor sentiments are tied into REIT prices

Transparency – Has to be transparent in order to qualify as a REIT

Drawbacks

Higher volatility – Due to greater liquidity, other factors besides underlying fundamentals tend to influence returns

Higher correlation – Higher correlation to major asset classes than private real estate

Most common public real estate investment vehicle is the Real Estate Investment Trusts (REITs).

REIT is a special type of company created securities which allow investors to participate in the commercial property markets through readily traded shares of a public company.

Simply, REITs can be viewed as shares of companies in the real estate business.

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Public Real Estate Real Estate Investment Trusts

Publicly traded

Required to distribute 90% of income as dividends

Ownership must include 100 shareholders or more (with a prohibition against five or fewer shareholders owning 50% or more of the shares)

Required to have 75% of assets in real estate investments

Required to earn 75% of income from real estate investments

Must hire independent real estate professionals to execute certain management activities

Risk/return profile similar to that of a small cap value equity investment

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Public Real Estate Real Estate Operating Companies

REOCs are similar to REITs but have fewer restrictions:

Do not have to pay specific level of income as dividends – can be reinvest like a corporation

Do not share the same tax advantage as REITs

No minimum on the number of owners and no restriction on ownership concentration

Can invest in any real estate assets of its choosing

Income may be derived from any investment combinations

Do not need to hire outside management

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Private Real EstateCommingled Funds/Limited Partnerships/Separate Accounts

Advantages Low volatility – Less frequent valuation; prices are more inline with the

value of the underlying real estate assets Lower correlation with stocks and bonds – Returns are less driven by

investors’ sentiments

Drawbacks Less transparency – Less required disclosure Infrequently priced – Valued once a month or once a quarter Limited liquidity (some restrictions on redemptions - generally quarterly)

Private real estate assets typically trade through individually negotiated transactions.

Institutions may make use of separate accounts or commingled funds to participate in this form of real estate investing.

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Public vs. Private Real Estate: Historical Performance

0%

5%

10%

15%

20%

25%

30%

35%

3 Months* 1 Year 3 Year 5 Year 10 Year 15 Year 20 Year

NCREIF Property NAREIT-All

Data as of 6/30/05Source: Ibbotson* Not annualized

NAREIT Index (benchmark for REITs) has outperformed the NCREIF Property Index (benchmark for private real estate investments) over the short run and the long run.

Over the 20 year period, NAREIT Index returned 10.2% (with leverage) while NCRIEF Property Index returned 7.8% (without leverage).

Cumulative Annualized Return

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Public vs. Private Real Estate: Volatility In Returns

Source: IbbotsonNAREIT Index started in 1972 and the NCREIF Index started in 1978

Annual Consecutive Returns

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

78 80 82 84 86 88 90 92 94 96 98 00 02 04

NCREIF NAREIT

Since REITs trade publicly on a daily basis, the returns are more volatile.

REIT returns are influenced by investor sentiment as well as the value of the underlying real estate investments.

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Public vs. Private Real Estate: Rolling Average

-10%-5%

0%5%

10%

15%20%25%

30%35%

80 82 84 86 88 90 92 94 96 98 00 02 04

NAREIT NCREIF

12 Quarter Rolling Average1/1978 – 6/2005

Source: Ibbotson

On a rolling 12 quarter basis, REITs and private real estate investments have traded leadership.

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Public vs. Private Real Estate: Leverage

Use of Leverage: Core Private - below 50% REIT - 50% on average Value Added - 50%-60% Opportunistic - 60%-80%

Benchmark Comparison: The NAREIT Index returns include historical levels of REIT

leverage whereas NCREIF Property Index returns are reported on an unleveraged basis

The effects of leverage has enhanced the returns of the NAREIT Index especially in more recent times

Source: Bloomberg, RREEF

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Public vs. Private Real Estate: Dividend/Income Yields

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

95 96 97 98 99 00 01 02 03 04

Dividend

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

78 80 82 84 86 88 90 92 94 96 98 00 02 04

Income

NAREIT All Index Dividend Yield NCREIF Property Index Income Yield

Current yields on REITs have decreased significantly, falling from 8.99% in 1999 to 5.02%.

Private real estate yields have decreased more moderately, falling from 2.23% in 1997 to 1.61%.

Source: Bloomberg, RREEFAs of 9/30/05

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Public vs. Private Real Estate: Return vs. Risk

NCREIFLB AGG

NAREITS&P 500

0%

2%

4%

6%

8%

10%

12%

14%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

NCREIF NAREIT LB AGG S&P 500

Annualized Return/Risk1/1978-6/2005

Source: IbbotsonNAREIT Index started in 1972 and the NCREIF Index started in 1978

Historically private real estate investments have behaved more like fixed income while REITs are more similar to equities

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Public vs. Private Real Estate: Historical Correlation

Ten Year Correlation

S&P 500Russell 2000 MSCI EAFE LB Aggregate NAREIT NCREIF

S&P 500 1          

Russell 2000 0.88 1        

MSCI EAFE 0.86 0.82 1      

LB Aggregate -0.40 -0.38 -0.41 1    

NAREIT 0.33 0.56 0.29 0.09 1  

NCREIF 0.14 0.01 0.10 0.04 0.00 1

Correlation as of 6/30/05Source: Ibbotson

Core private real estate has been less correlated to other major asset classes than REITs.

Though higher in correlation than core private real estate, investing in REITs does provide diversification benefits.

As of 9/30/05, Russell 2000 Index had approximately 6.5% in REITs.

REITs are currently a permissible investment for FCERA’s small cap managers as 6.5% of the Russell 2000 Index is composed of REITs.

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Developing a Real Estate Strategy Public vs. Private Investments

FCERA’s existing real estate allocation is made up of all private real estate

As of 6/30/05, core private real estate is underweighted relative to other styles

If FCERA decides to invest in REITs as a designated assets class, Wurts & Associates recommends patience as yields will likely to rise in the future

•TA Realty

•JER

•Heitman•JMB•Sentinel

Core11%

Opportunistic25%

Value-added64%

Data as of 6/30/05