Illiquid vs. Liquid Investments: Why Long-Term Investors Should Consider Private Real Estate

Rethinking the Role of Liquidity in Investment Strategy

For most investors, liquidity is seen as an unequivocal good — a key feature of smart portfolio construction. The ability to quickly buy or sell an asset provides flexibility, optionality, and, at least in theory, a sense of control. But this flexibility has a cost. As market volatility intensifies and long-term outcomes take precedence over short-term trades, a growing number of investors are asking: what if illiquidity is actually a strength?

This paper explores the long-term case for illiquid investments — particularly in private Canadian real estate — and why high-net-worth investors and institutions are increasingly allocating capital toward assets that trade access for stability, consistency, and real-world value.

The Hidden Cost of Liquidity

Liquid investments — public equities, mutual funds, and publicly traded REITs — are priced continuously and can be sold at the click of a button. But this immediacy often encourages behaviour that undermines long-term performance. Market volatility, driven by sentiment, headlines, and speculation, can lead investors to make reactive decisions. The ease of exiting a position quickly becomes a trap: portfolios get whipsawed by short-term noise, and gains are sacrificed in moments of panic.

Moreover, liquid markets carry an embedded cost structure. Investors frequently pay a “liquidity premium” — accepting lower potential returns in exchange for the ability to exit at will. In contrast, illiquid assets require longer holding periods but may offer more attractive risk-adjusted returns over time, in part because they are insulated from daily pricing pressures.

Illiquidity as an Advantage — Not a Limitation

Illiquid investments, by their very nature, are slower-moving and less exposed to the psychology of the market. This makes them especially well-suited to long-horizon investors. In private real estate, for example, asset values are determined through appraisals, not intraday trades. Rental income flows steadily, tenant covenants are locked in through long-term leases, and value is created not through speculation but through operations, repositioning, and management discipline.

Perhaps most important, illiquidity enforces investor patience. When capital is committed for multiple years, it becomes much harder to overreact to short-term market disruptions. For many investors, this structural constraint is actually a psychological advantage. It keeps them focused on fundamentals and aligned with the slow, compounding nature of true wealth building.

The Private Real Estate Edge: Income, Appreciation, and Control

Private real estate offers a unique combination of characteristics that make it a powerful illiquid investment. Unlike public equities, which are passive ownership stakes in companies, real estate is a tangible asset that generates both yield and potential capital appreciation. Rental income provides steady cash flow, while appreciation is driven by both macro factors (such as urban growth and supply constraints) and active management decisions (such as lease improvements or property repositioning).

In Canada, the industrial real estate sector has become a standout performer. National vacancy rates in core markets like Toronto, Vancouver, and Montreal have remained below 3%, supported by sustained demand from logistics, e-commerce, and manufacturing tenants. Over the last decade, Canadian industrial real estate has delivered annualized returns of 12% — outpacing not only other property sectors but also public equity indices.

Comparative Performance: Stability Without Sacrificing Growth

While investors may assume that illiquidity requires sacrificing returns, the data suggests otherwise. One Canadian private real estate fund focused on core industrial assets — the CanFirst IncomePlus Real Estate Fund (CIPREF) — has delivered an annualized return of 11.0% since inception in 2018. Importantly, this performance came with significantly lower volatility than public market benchmarks. Over a five-year period, CIPREF reported a standard deviation of just 7.2%, compared to 15.8% for Canadian equities and 16.0% for Canadian REITs.

This combination of high returns and low volatility improves portfolio efficiency — in financial terms, it shifts the efficient frontier. Investors gain exposure to equity-like upside with bond-like risk, which is especially attractive in uncertain economic environments.

Tax Efficiency: A Quiet but Powerful Benefit

In addition to performance stability, private real estate often carries significant tax advantages. Funds structured as limited partnerships may distribute income in the form of return of capital (ROC), which can defer taxable events and enhance after-tax returns. In 2023, for example, CIPREF’s entire distribution was characterized as ROC — translating to a tax-equivalent yield of 8.4% for a high-income Ontario investor.

Unlike public REITs or bonds, which typically pay interest or dividend income taxed at the highest marginal rate, tax-efficient structures allow private real estate funds to preserve more value on an after-tax basis. For high-net-worth families or advisors focused on intergenerational wealth planning, these details make a material difference over time.

Why This Matters Now

The current investment environment is characterized by volatility, rising interest rates, and shifting inflation expectations. For many investors, traditional portfolios built on a 60/40 mix of equities and bonds are no longer delivering consistent outcomes. In this context, illiquid investments — especially in sectors with durable demand and limited supply — offer a compelling path forward.

Private Canadian real estate is not a speculative bet. It’s an essential component of the economy: warehouses, logistics hubs, cold storage, and industrial parks that power everything from food distribution to e-commerce fulfillment. These are not flashy assets, but they are dependable — and increasingly difficult to replace. Owning a piece of this backbone offers more than just returns. It offers relevance, resilience, and long-term value.

Conclusion: A Case for Patience and Purpose

Illiquidity isn’t a flaw in an investment. It’s a filter. It requires intentionality, longer time horizons, and a tolerance for deferred gratification — the very qualities that often underpin successful wealth creation. For investors seeking a more stable, tax-efficient, and compounding-oriented approach, illiquid assets like private real estate deserve serious consideration.

As with any investment, due diligence matters. But for those able to commit capital for the long term, the benefits of illiquidity — stability, discipline, and the potential for superior after-tax returns — are not just theoretical. They are increasingly quantifiable, particularly in Canada’s industrial real estate landscape.

Learn More

To explore how private real estate may enhance your long-term portfolio, download the CIPREF Fund Summary or connect with our investor relations team to learn more.