Home News Public REITs Are Down, Nontraded REITs Are Up. Which Is Right?

Public REITs Are Down, Nontraded REITs Are Up. Which Is Right?

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It’s been a terrible year for many listed real estate investments as rising interest rates and falling property prices have hit the market. The MSCI US REIT Index, which tracks listed REITs, is down about 26% this year.

But it’s been a good year, especially for the types of investments that are popular with individuals. Non-trading real estate investment trustSome of these funds have a return of around 10%. Some investors are concerned about this difference, and believe his untraded REITs are immune to market crashes, which could result in losses for investors buying these.

Alan Ross, founder of Wealth Logic LLC, a financial planning firm based in Colorado Springs, Colorado, said:

“While the market is punishing listed REITs, I’m running for the hills as non-trading REITs are gaining valuations.”


— Alan Ross of Wealth Logic LLC

Non-trading REITs are similar to public REITs in that they buy commercial properties such as warehouses, apartments, and office buildings. The difference is that public REITs raise funds by selling shares on the stock market, while non-trading REITs raise funds directly from individuals primarily through financial advisors. These retail investors can only cash out periodically through the fund’s sponsors.

Public REITs are valued differently as they are valued according to the value of shares traded on the stock market. Non-trading REITs are valued monthly by the sponsor who works with independent appraisers who analyze the value of the commercial properties they own.

Unlisted REITs are part of a booming private investment market that has attracted individuals and institutions eager for higher yields, hot start-ups and funds that appear to be less volatile than the public market. Non-trading REITs have raised more than $92 billion in the past five years, according to investment banker Robert A. Stanger & Co., which tracks the market.

These funds have been highly profitable for companies such as:

black stone Ltd,

Starwood Capital Group, etc. Blackstone Real Estate Income Trust, known as BREIT, has raised more than $62 billion of his, and Starwood Real Estate Income Trust (SREIT) has raised about $12.7 billion, Stanger said.

Withdrawals from Blackstone Real Estate Income Trust increased to an estimated $3 billion in the third quarter.


Photo:

Amir Hamja/Bloomberg News

Both funds are up about 10% this year, including higher share prices and dividends. The 26% decline in the MSCI REIT Index also includes dividends. Investors in these funds are concerned about declining property values, recent stagnation in rents and rising interest rates, making the returns generated by REITs less attractive and increasing the funds’ borrowing costs.

Some investors are asking why the value of non-trading REITs continues to rise. Condo prices have fallen 14% over the past 12 months, while industrial property prices have fallen 9%, according to property analytics firm Green Street. Also related to e-commerce Demand for distribution centers is softeningInvestors are concerned that office building prices could fall as people continue to work from home.

Meanwhile, institutional investors are selling stakes in private real estate funds, sometimes willingly accepting prices as much as 10% below net asset value, according to experts who focus on secondary market transactions of these investments. . Third Quarter, Latest Valuations.

“The sale is in anticipation of a potential future decline in value,” said Phil Barker of ACRE Solutions LLC, which helps large investors buy and sell shares in private real estate funds in the secondary market. But he doesn’t deal with non-trading REITs. “Interest rates and inflation will rise, public property prices will fall, and private property prices will eventually respond.”

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Sponsors of non-trading REITs claim their net asset values ​​continue to rise as they continue to see strong cash flows.Some countries have taken steps to prevent interest rates from rising; According to Blackstone, its interest rate hedging has added $4.4 billion to the value of untraded REITs this year. Blackstone and Starwood funds also focus on some of the strongest sectors, including condominiums, where the housing market is booming, and industrial real estate, which will benefit from the growth of e-commerce.

Starwood noted that non-trading REIT asset values ​​have increased only 0.64% over the past three months, which was “primarily driven by the value of non-real estate assets.”

Sponsors point to the stock market being more volatile than the value of the property they own in most cases, and the fact that listed REITs have been trading high since the beginning of the year, which is the reason for the sharp decline. Blackstone executives recently bought shares in their own funds.

Concerns about non-trading REITs tend to be weighed more heavily by past valuations than by publicly traded investments, experts say. Non-public valuations are based, in part, on the most recent available reports of transactions and valuations, which, for example, may reflect outdated data.

“Net asset value is as accurate as possible, and there is nothing wrong with how private funds are valued, but because it is a retrospective indicator, it is slow to react to real-time market conditions,” Barker said. says. “There has been a dramatic shift in the market over the past 1.5 quarters.”

A Blackstone spokesperson said:

Some investors are wary of non-trading REITs. According to Stanger, investor withdrawals from his REIT at Blackstone increased to an estimated $3 billion in the third quarter, compared with his $711 million in the first quarter. Blackstone said it raised $4.2 billion in the third quarter, including reinvested dividends. According to Blackstone, the majority of these withdrawals came from Asia-based investors, likely because they wanted “a way to address liquidity and leverage concerns.”

Blackstone president Jonathan Gray said on an earnings call earlier this month that the redemption amount could soon outstrip the new funding. “For some time there could have been negative results,” he said.

Overall, Stanger estimates that about $31 billion will be invested in these funds this year, down from its previous forecast of $45 billion.

Non-trading REITs allow investors to cash out, but if too many investors want to cash out at the same time, the sponsor can freeze redemptions. We allow withdrawals of 2% per month and 5% per quarter of net asset value, but these levels may be adjusted by the sponsor’s board of directors.

So far, none of the untraded funds have capped redemptions, but that could change as more investors head to the door. Kevin Gannon, Chief Executive Officer of Stanger, said:

Write to Gregory Zuckerman: [email protected] Peter Grant [email protected]

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