Home News Commercial-Property Funds for Small Investors Face Tougher Regulation

Commercial-Property Funds for Small Investors Face Tougher Regulation

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The association of state securities regulators is poised to tighten restrictions on the general way individuals invest in commercial real estate, making investments more expensive than many uninformed investors realize. said to be at high risk.

The North American Association of Securities Administrators is considering new policies that would limit the amount of money individuals can invest in funds and set other new rules.

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Known as non-trading real estate investment trusts, these funds are one of the few ways individuals can gain direct access to office towers, warehouses, hotels and other commercial properties. The fund raised a record $36.4 billion last year and is expected to roughly match that level this year, according to investment banking firm Robert A. Stanger & Co., which tracks the market.

While the fund’s documentation describes the risks and charges associated with the product, the Association notes that these REIT strategies are not always suitable for the smaller investors who typically buy them. says no.

“The product structure presents unique risks for the uninformed investor,” said Andrea Seito, Ohio’s securities commissioner and chairman of the association committee leading the effort.

The association, which has not revised its policy on funds since 2007, is considering adding rules to limit the amount investors can purchase and limit REITs from certain practices.

Those working in the industry say the proposed changes will prevent investors from pursuing sound investment strategies, and fund sponsors, brokers and financial advisors have already addressed the association’s concerns.

Non-trading REITs are one of the few ways individuals can invest in office towers, warehouses, hotels, and other commercial real estate, including in New York City.


Ed Jones/Agence France-Presse/Getty Images

“In many ways, this is a solution to a problem,” said Anya Kerman, senior vice president of the Institute for Portfolio Alternatives, a trade association representing the non-trading REIT industry.

The Securities Association is a voluntary body of North American regulators and has no authority to change regulations on its own. However, many state regulators have adopted the association’s recommendations. We are currently accepting comments on the proposed regulation from industry stakeholders.

If the association approves the policy and adopts it in most states, funding by non-trading REITs could be cut by more than 20%, according to Kevin Gannon, chief executive of Robert A. Stanger. I have.

Non-trading REITs buy the same types of real estate as listed REITs, but are not listed on a stock exchange. Rather, investors buy shares through broker-dealers and financial advisors. The fund has been around for more than 20 years and has clashed with regulators in the past over the degree of risk disclosure and high fees.

The fund’s recent surge in popularity started about five years ago.

black stone Ltd,

One of the world’s largest real estate investors Launched first non-trading REIT It features a new structure that addresses many of the industry’s criticisms.

for example,

Blackstone Real Estate Income Trust Ltd.

It charged lower fees and offered more liquidity than many of its previous crops. It also offered a healthy dividend in a period of historically low interest rates at the time. Starwood Capital Group,


& Co. and

ares management Ltd.

continued with such funds of their own.

Blackstone is among industry players who challenged the association’s proposed limits. “It is shameful to restrict retail investors’ access to the types of investments that have benefited pension funds and endowments for decades,” the company said.

Despite these improvements, investor complaints related to real estate investment trusts were submitted last year to an arbitration panel run by the Financial Industry Regulatory Authority, the securities industry’s self-regulatory body, Seit said. That figure includes listed REITs, but most of the complaints were about untraded REITs, according to industry insiders. It was the second largest investment product after equities.

Investors can more easily cash out of new-generation non-trading REITs, but sponsors may freeze redemptions if too many investors want to cash out at the same time, Seidt said. . Fees are also higher than other investment products, but lower than before, she said.

Many of the new provisions in the association’s proposal have slammed the industry, including one that prohibits non-trading REITs from paying distributions from proceeds from the sale of shares.

Most controversial is the proposed concentration rule, which would limit investors from investing more than 10% of their net liquidity in non-trading REITs and other investments offered by REIT sponsors. Sait said this would prevent small investors from suffering large losses if the REIT went bankrupt or if the sponsor terminated the redemption.

Industry insiders say the proposed concentration limit would apply an unfair, one-size-fits-all standard to all investors. Such decisions should be made by investors and their broker-dealers or financial advisors, Coverman said.

Coverman said a new generation of non-trading REITs is holding up during the pandemic. Only some pending redemption requests. As a result, only a few investors who wanted to cash out at the time were blocked from doing so, she said.

“It doesn’t reflect failure,” she said. “That’s a good story.”

write destination Peter Grant [email protected]

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