The Lure of Nontraded REIT May be an Illusion

(source: Small Investors Pour Cash Into Reborn Real-Estate Funds, WSJ.com, https://www.wsj.com/articles/small-investors-pour-cash-into-reborn-real-estate-funds-11578398401?mod=article_inline&tesla=y retrieved 6/24/2020)

These funds, which have been around for 20 years. Proponents say they offer more direct exposure to the property market than public REITs, which can be subject to stock market volatility that can whipsaw these real-estate companies’ shares even when property markets are doing well.

Many analysts believe a traditional stock and bond portfolio will likely produce annual returns between 2% to 5% over the next three to seven years. 

Nontraded REITs have plenty of critics, who say that investors get the cheapest commercial real-estate exposure with public REITs, which cost the same brokerage fee to buy or sell as any other listed stock.

Trading liquidity is also much better with a listed company. Investors who need to cash out of mall giant Simon Property Group or New York office landlord SL Green Realty know they can do so with a simple call to their broker.

It can be trickier with a nontraded REIT. While most of the new ones will buy back stakes from investors needing their money, they will start limiting redemptions if they get too many requests at once.

Detractors also say some of these REITs pay dividends partly from the capital they are raising from investors. That increases the risk of a dividend cut if the REITs can’t generate enough cash from property investments.

This dividend pledge is “a marketing gimmick in my mind,” said a portfolio manager.

Many of today’s REITs charge upfront fees of less than 5%, but also take a piece of the profits if they exceed a certain amount. Nontraded REITs in the first half of the last decade charged upfront fees as high as 13%. 

The old crop of nontraded REITs also were structured as closed-end funds that promised to liquidate and return money to investors after a number of years. Some were slow to report the true value of the funds, leaving investors in the dark about the value of their shares until the funds liquidated.