Forget REITs: Why Private Credit Beats Real Estate for Income Investors Today
- Steadfast Equity
- Jun 23
- 9 min read
Updated: Jun 26
Private credit is emerging as a stronger option than REITs for income investors in 2025. Here's why:
- Higher Yields: Private credit offers yields of 10.15% - significantly higher than REITs, which average 4% for equity REITs and 12.27% for mortgage REITs.
- Floating Interest Rates: Private credit loans are often tied to floating rates, providing protection against rising interest rates, unlike REITs' mostly fixed-rate debt.
- Lower Volatility: Private credit has about 75% less volatility than stocks and outperformed during past market downturns.
- Custom Security: Loans are backed by collateral and protective covenants, reducing risks compared to public market instruments.
Quick Comparison
Factor | Private Credit | Public REITs | Private REITs |
Yield | ~10.15% | ~4% (equity), ~12.27% (mortgage) | Up to 10% |
Liquidity | Illiquid | High | Illiquid (3–10 years) |
Volatility | Lower | Higher | Lower |
Interest Rate | Floating | Fixed | Fixed |
Private credit offers higher yields and greater stability but requires locking up capital. REITs provide liquidity but are more sensitive to market swings and interest rates. Choose based on your income needs and liquidity preferences.
How Private Credit Is Reshaping Real Estate Investing
1. Private Credit
Private credit offers a way to tap into higher-yield opportunities that aren't available in traditional public markets. Unlike stocks or bonds that trade openly on exchanges, private credit involves loans negotiated directly between borrowers and non-bank lenders. These customized loans often come with the potential for better returns.
As of January 31, 2025, private credit yields stood at 10.15%, offering a 226 basis point premium over B-rated loans, which are its closest public market equivalent. This premium has nearly doubled since January 2021 when it was 121 basis points.
"Investors have long turned to private credit, seeking the yield premium it has traditionally offered over public credit markets." - FS Investments
Higher Yields Through Premium Structures
Private credit benefits from two key premiums: and . Since these investments aren't easily traded like public bonds, lenders demand higher compensation. For example, spreads for sponsor-backed private credit strategies and non-sponsored deals typically range from 115 to 280 basis points higher than those of syndicated loans. This advantage becomes even more pronounced when high-yield bond spreads are near their historic lows following the Global Financial Crisis.
Interest Rate Protection and Stability
One of the standout features of private credit is its reliance on floating interest rates, often tied to benchmarks like SOFR. This structure acts as a natural hedge against rising rates. From Q1 2008 to Q3 2023, direct lending delivered average returns of 11.6%, outperforming leveraged loans (5%) and high-yield bonds (6.8%). Unlike fixed-rate bonds that lose value when rates rise, floating-rate private credit investments can adjust, allowing income to increase in real time.
Enhanced Risk Management
Private credit loans often come with secured collateral and custom protective covenants, which help reduce risks during defaults. These negotiated terms provide a level of investor protection that public market instruments generally can't match. Over time, private credit has shown lower loss rates compared to public credit and has maintained a lower correlation with public markets, making it a valuable addition to a diversified portfolio.
Diversification Beyond Public Markets
Private credit allows investors to access middle-market companies and niche lending opportunities that aren't typically available through public channels. By strategically allocating investments across various private credit segments, investors can improve their risk–return balance. Diversified portfolios in this space often deliver better returns per unit of risk.
For income-focused investors who value steady cash flow over liquidity, private credit's multi-year illiquidity requirement is a tradeoff that supports its higher yields. This makes it an appealing choice in today’s market.
Public Credit | Private Credit |
Liquidity: High (publicly traded) | Liquidity: Limited (privately held) |
Yields: Lower, market-determined | Yields: Higher, due to illiquidity premium |
Structure: Standardized terms | Structure: Customized, flexible terms |
Interest Rate: Usually fixed rate | Interest Rate: Typically floating rate |
Access: Widely accessible | Access: More exclusive but expanding |
2. Real Estate Investment Trusts (REITs)
REITs offer a liquid way to invest in real estate, but this accessibility comes with trade-offs in yield and volatility. By law, REITs must distribute at least 90% of their taxable income to shareholders, making them a source of direct income through publicly traded securities. However, their public nature means they are not immune to market challenges, particularly in today’s shifting economic environment.
Current Yield Landscape
As of April 7, 2025, U.S. equity REITs provide an average dividend yield of about 4%. Meanwhile, mortgage REITs offer much higher yields, averaging 12.27%. For investors focused on income, choosing the right sector is critical to balancing risk and return.
Income Stability and Interest Rate Sensitivity
Rising interest rates pose a challenge for REITs. Approximately 91% of REIT debt is fixed-rate, with an average maturity of 6.2 years. While this fixed-rate structure shields current income streams from immediate rate hikes, it also limits flexibility as borrowing costs climb. Despite these pressures, REITs have maintained operational stability, supported by consistent growth in funds from operations.
Risk-Reward Dynamics
REITs show a moderate correlation with public equities, with a coefficient of 0.59. This connection was evident in 2022 when the S&P 500 posted a -18.1% total return, while U.S. REITs fared worse, with a -25.1% return. With a beta of 0.75, REITs are less volatile than the broader market, but they still experience significant price swings during periods of market stress. In contrast, private real estate investments exhibit much lower correlation with public markets, highlighting the trade-off between REIT liquidity and increased volatility.
Long-Term Performance Context
Over the 30 years from 1994 to 2024, self-storage REITs delivered the highest average annual total returns at 16.7%, followed by industrial REITs at 13.3%. Looking ahead, analysts project a 9.5% total return for REITs in 2025, aligning closely with the historical long-term average of around 10%.
"Given the current disconnect, REITs offer an attractive entry point to global real estate and an opportunity for outperformance as private markets continue to correct." - PGIM
Diversification Limitations
While REITs provide diversification across property types and geographic locations, their correlation with public equities limits their effectiveness as a hedge during stock market downturns. At present, implied cap rates for REITs stand at approximately 5.9%, just 130 basis points above the 10-year Treasury yield. This spread is narrower than the long-term average of 200 to 300 basis points, reflecting the challenges income investors face when weighing REITs' liquidity against their market dependencies. These dynamics highlight the need for careful consideration when incorporating REITs into income-focused strategies.
Advantages and Disadvantages
Let’s dive deeper into the trade-offs between private credit and REITs. Both asset classes offer distinct opportunities and challenges, making it crucial for income investors to weigh their options carefully.
Private Credit: High Yields, But Less Flexibility
Private credit stands out for its ability to deliver higher yields, thanks to its illiquid nature and tailored financing structures. The inclusion of floating rates provides a built-in defense against rising interest rates. Additionally, collateral-backed loans offer a layer of security. For example, in 2022, direct lending experienced minimal losses compared to the steep declines seen in high-yield bonds. During the 2008–09 Global Financial Crisis, private direct lending saw a peak-to-trough loss of only 7.7%, a stark contrast to the 27% drop in high-yield bonds.
However, the illiquidity of private credit is a key drawback. These investments are not easily sold, making them less suitable for investors who might need quick access to cash. On top of that, private credit carries credit risk and requires thorough due diligence due to its lower transparency compared to public markets.
REITs: Liquidity with a Trade-Off
REITs, on the other hand, offer the advantage of immediate liquidity along with a steady dividend stream, thanks to regulatory requirements. However, this ease of access often comes at the cost of lower yields and greater sensitivity to market movements.
The income potential varies across REIT types. Public REITs typically yield around 3.5%, while private REITs can offer yields as high as 10%. That said, private REITs often come with lock-in periods ranging from three to 10 years, which limits their liquidity. Public REITs, while liquid, tend to be more volatile, reflecting broader market swings.
Comparing the Numbers
Here’s a quick breakdown of how private credit, public REITs, and private REITs stack up:
Factor | Private Credit | Public REITs | Private REITs |
Yield | Higher than traditional bonds | ~3.5% dividend yield | Up to 10% |
Liquidity | Illiquid | High (instant access) | Illiquid (3–10 year lock-up) |
Volatility | Lower (about 75% less than stocks) | Higher (about 3× private real estate) | Lower |
Interest Rate Protection | Strong, due to floating rates | Standard | Standard |
Risk-Adjusted Returns: A Closer Look
Private credit has delivered returns on par with U.S. stocks but with significantly less volatility - about 75% less. Over the past decade, it has also outperformed real estate. For instance, during the market chaos of Q1 2020, private credit declined by just 7.6%, compared to the S&P 500’s 19.6% drop.
Balancing Yield and Liquidity
Ultimately, the choice boils down to balancing higher yields against liquidity needs. For those who can lock up capital for extended periods, private credit offers an appealing illiquidity premium and robust structural safeguards. On the flip side, investors seeking flexibility may lean toward public REITs, even if it means accepting lower yields and greater volatility.
Another advantage of private credit is its negotiated covenants, which help mitigate risk and protect capital during uncertain economic times. With institutional demand for private credit expected to hit $2.8 trillion by 2028, it’s clear that this asset class is gaining traction as a compelling option for income investors, especially as traditional fixed-income investments face challenges like low yields and duration risk.
Final Thoughts
Private credit continues to stand out as a top choice for income investors heading into 2025. While REITs face mounting challenges, private credit has shown remarkable resilience and consistent income potential.
Over the past decade, private credit has delivered nearly double the returns of real estate, matching U.S. stock market performance with only 25% of the volatility, as highlighted in recent analysis. With the market nearing $2 trillion in assets under management in 2024, institutional investors are clearly taking notice of its strengths.
"Private credit is doing exactly what investors hoped it would in a year like this: providing strong, floating-rate yield and acting as a shock absorber from market volatility." - Daniel Pietrzak, Global Head of Private Credit at KKR
These dynamics emphasize the importance of tailoring your investment strategy. Investors should evaluate how private credit fits into their broader portfolio, considering factors like liquidity needs and risk tolerance. For those who can commit capital for extended periods, private credit offers the potential to capitalize on the illiquidity premium. On the other hand, if liquidity is a priority, public REITs may be a better fit, despite offering lower yields.
To manage risk effectively in today’s high-interest-rate environment, consider diversifying across various private credit strategies, such as direct lending, asset-based finance, and specialty finance.
"We continue to think security selection will remain key, regardless of the rate environment. Investors with the ability to avoid weaker credits through deep credit underwriting and enhanced structuring could be well-positioned in this new regime."
Choosing the right managers is also critical. Look for those with proven expertise in credit underwriting and established long-term market relationships. Notably, over 80% of assets raised since 2022 have been entrusted to experienced professionals.
Finally, keep an eye on the evolving regulatory environment. The SEC has increased scrutiny on disclosures and valuation practices. Staying informed about these changes will help ensure that your private credit investments align with your financial goals and overall portfolio strategy.
FAQs
What are the key risks of investing in private credit compared to REITs?
Investing in private credit carries its own set of challenges compared to REITs. One major concern is borrower default, as these investments often involve lending to businesses that could be struggling financially. Another factor to consider is the potential for collateral values to fluctuate, which can affect how much is recovered in the event of a default.
Private credit also tends to be less liquid, making it more difficult to sell or exit these investments quickly. Managing private credit portfolios can be particularly tricky, especially during economic downturns when markets are fragile, and overleveraging becomes a bigger risk. While the yields from private credit can be appealing, it's important to carefully balance these risks against your financial goals and how much risk you're willing to take on.
How does the lack of liquidity in private credit investments affect an investor’s portfolio strategy?
Private credit investments tend to be less liquid, meaning they can't be quickly sold or turned into cash. This lack of liquidity pushes investors to think long-term, prioritizing steady, reliable returns rather than immediate access to their money.
Although the reduced liquidity might seem like a downside, it often comes with an upside: higher yields compared to more liquid options. For those focused on generating income, this trade-off can be quite attractive, particularly when aiming to add both diversification and stability to their portfolios.
Why is private credit a strong option for income investors in today’s rising interest rate environment?
Private credit has become an appealing option for income-focused investors, especially in a climate of rising interest rates. One of its standout features is the higher yields it offers, often falling in the 8% to 10% range - a level that typically surpasses what traditional fixed-income investments can provide. This makes it an attractive alternative for those seeking better returns.
What’s more, as banks tighten their lending standards, private credit providers are stepping in to fill the gap. This shift opens up a wealth of opportunities, creating a favorable balance between supply and demand in the private credit market.
Another notable benefit is its diversification and stability. Unlike many traditional investments, private credit is less influenced by market swings. It also grants access to unique lending opportunities, often secured, which can act as a stabilizing force in an income-focused portfolio. These qualities make private credit a strong and dependable choice for investors aiming for steady income in today’s unpredictable market.
