One of the biggest stories buzzing through the non-traded REIT industry is the fact that the industry hit a $20 billion high water mark in 2013—almost double the $10.3 billion raised in 2012.
That record high volume of capital pouring into the sector would seem to suggest that non-traded REITs are riding high on a wave of eager investors who are looking to put more money into the growing niche. Yet there is more to the story than that. “The primary reason for this increase has been an increase in the number of REITs going full-cycle and a recycling of proceeds from investors back into the market,” says Vee Kimbrell, managing partner at Blue Vault Partners, an Atlanta-based research firm.
In fact, a significant amount of that capital is a direct result of the $16 billion in full-cycle events that were completed during 2013. Blue Vault Partners estimates that without this return of capital to existing investors and their subsequent reinvestments, the industry would have only seen about $6 million to $8 billion in new money.
Full-cycle liquidity events are triggered when a non-traded REIT lists its shares on a public stock exchange, liquidates its portfolio through the sale of all individual properties, or is acquired by or merges with another entity. That momentum of reinvestment capital could very well continue into 2014. At least six additional non-traded REITs have announced they will complete a full-cycle event within the first half of 2014, notes Kimbrell.
Those non-traded REITs that expect full-cycle events include:
- Corporate Property Associates 16 - Global, Inc.
- American Realty Capital Trust IV Inc.
- Paladin Realty Income Properties Inc.
- American Realty Capital Healthcare Trust Inc.
- Bluerock Residential Growth REIT Inc.
- Plymouth Opportunity REIT Inc.
More changes ahead
Certainly, kudos go out to the sector for attracting the most capital ever in a calendar year. However, what that volume does not show is that the industry is shrinking in terms of the number of sponsors and new offerings. “The contraction in the industry is primarily the result of the full-cycle events and those sponsors that have decided not to introduce new products once they have completed liquidity events,” says Kimbrell.
Last year, Chambers Street and Independence Realty Trust completed full-cycle events and did not introduce new offerings. There are four more on tap for 2014 that also are not planning new offerings, including Paladin, Bluerock, Plymouth and Wells Real Estate Funds. The most significant of all of these companies is Wells Real Estate Funds as it is has been a top player in the industry with numerous REITs since 1997, notes Kimbrell. Wells announced last year that it planned to wind down all non-traded REIT operations. The company has said that it is moving to the sidelines due in large part to the uncertainty related to proposed regulations that are aimed at creating new transparency guidelines for non-traded REITs.
Overall, there were only nine new product offerings introduced last year compared to a high of 15 in 2010, according to Blue Vault Partners. In addition, the number of non-traded fundraising REITs has dropped from 37 at the end of 2012 to its current level of 32. In total, there are 72 non-traded REITs.
Part of that decline is due to industry consolidation. For example, American Realty Capital and Cole Real Estateannounced their planned merger last fall. The two firms are recognized as the two most active non-traded REIT sponsors in the sector. They raised roughly 60 percent of the total funds raised for non-traded REITs during 2013, according to Blue Vault Partners. The merger is expected to be completed in the first quarter.
Non-traded REITs are continuing to attract capital even though the sector does draw fire from critics. While non-traded REITs generate decent dividend yields for investors, their shortcomings are numerous, notes Jim Sullivan, managing director, REIT research, at Green Street Advisors in Newport Beach, Calif. High fees and illiquidity top the list ofnegatives. “Almost all investors would be better off investing in blue-chip publicly traded REITs such as Simon Property Group, Public Storage, Boston Properties and Equity Residential rather than any non-traded REIT,” says Sullivan.
The industry has been making an effort to lessen its heavy fee load. The average front-end fees have been declining since December 2009, when they averaged 13.2 percent. According to Blue Vault, average fees for the non-traded industry declined to 11.7 percent as of December 2012. Year-end 2013is not yet available.
Even with the fees, non-traded REIT performance does stack up to the publicly traded peers. Adjusted for front-end load fees of an estimated 12 percent, the average non-traded REIT achieved a 10.7 percent average annual return on its real estate portfolio, which is comparable to FTSE NAREIT publicly traded benchmark average of 10.45 percent. However, assuming an investment during the early stage of an offering and the reinvestment of distributions, average annual rates of return for the 27 full-cycle non-traded REITs studied by Blue Vault Partners ranged from -4.13 percent to 18.34 percent. The wide range of performance results also emphasizes the need for investors to weigh their choices carefully.
“Investors who are thirsty for yield, combined with giant commissions for financial planners, all but ensure that capital will continue to flow to the non-traded REITs,” says Sullivan. The goodis that some non-traded REIT sponsors are working to rid the industry of its most investor-unfriendly attributes. “Progress is being made, but this is a business where investors really need to read the fine print, understand what they are being asked to buy, and question the motivations of those selling the product,” says Sullivan.