But it’s been a strong year for one type of investment that’s especially popular with individuals: non-business real estate investment trusts. Some of these funds have given returns of around 10 per cent. The gap worries some investors — and it could spell harm for those who now believe that non-traded REITs are immune to market sell-offs.
“With nontraded REITs increasing their valuations while the markets are punishing public REITs, I’d run for the hills,” said Alan Roth, founder of Wealth Logic LLC, a financial planning firm based in Colorado Springs, Colo.
Nontraded REITs are like public REITs in that they purchase commercial property such as warehouses, apartments and office buildings. The difference is that public REITs raise money by selling shares on the stock market, while non-commercial REITs raise money directly, mostly from individuals through financial advisors. These individual investors are only able to withdraw cash periodically through the fund’s sponsors.
Valuations vary because of the value of public REITs traded on the stock exchange for their shares. Non-business REITs are valued by their sponsors working with independent appraisers, who analyze how much commercial property they hold.
Non-commercial REITs are part of a rapidly growing market for private investment, attracting individuals and institutions eager for high yields, hot startups, and funds that appear to be less volatile than public markets. An investment-banking firm tracking the market, Robert A. According to Stanger & Company, nontraded REITs have raised more than $92 billion in the past five years.
The fund has been a huge money maker for firms such as Blackstone Inc., Starwood Capital Group and others. According to Stanger, Blackstone Real Estate Income Trust, better known as Breit, has raised more than $62 billion, while Starwood Real Estate Income Trust, or SREIT, has raised about $12.7 billion.
Both funds are up about 10% this year, which includes increases in the share price and dividend. The 26% drop in the MSCI REIT index also included dividends. Investors in these funds are concerned about declining property values, recent weakness in rents and rising interest rates, which make the income generated by REITs less attractive and increase the cost of borrowing for the fund.
Some investors are asking why the value of nontraded REITs is rising. For one thing, according to real estate analytics firm Green Street, values of apartment buildings have dropped 14% in the past 12 months, while industrial-property values have declined by 9%. Even e-commerce-linked distribution centers are witnessing moderation in demand. Investors are concerned that the prices of office buildings could fall as people continue to work from home.
Meanwhile, institutional investors are selling interest in private real-estate funds, according to experts, who focus on the secondary-market trading of these investments, and are willing to accept prices that can sometimes exceed net assets. 10% less than the prices. Third quarter, most recent valuation.
“The sale is in anticipation of a potential future decline in price,” says Phil Barker of ACRE Solutions LLC, which allows large investors to buy and sell interests in private real-estate funds in the secondary market even though they are non-trading. “Interest rates and inflation are rising, public real estate prices are low and private real estate values will eventually respond.”
Sponsors of non-trading REITs argue that their net asset values continue to rise because they are still seeing strong cash flow. Some have taken steps to hedge against a rise in interest rates; Blackstone says its rate hedges have added $4.4 billion to the value of its non-traded REITs this year. And Blackstone and Starwood funds focus on some of the strongest sectors such as apartments, where the housing market is strong, and industrial properties that benefit from e-commerce growth.
For its part, Starwood reported that the property value of its non-trading REITs increased only 0.64% over the past three months and was “primarily driven by non-real estate values.”
Sponsors note that the stock market is almost always more volatile than the value of the properties they own and that publicly traded REITs started the year at exorbitant prices, one reason they have fallen so much. Blackstone executives have been buying shares of their fund recently.
Behind some concerns about non-traded REITs: Experts say their valuations tend to be heavier than those of publicly traded investments. Personal valuations are partly based on the most recent reports of transactions and valuations available, for example, which may reflect outdated data.
Mr. Barker says, “As accurate as net asset value can be, it has nothing to do with how private funds are being valued, but because they are backward-looking metrics, they rely on real-time market conditions. are slow to react.” “There has been a seismic shift in the market over the past quarter and a half.”
A Blackstone spokesperson said: “BREIT prices are updated monthly and reflect private market values on a real-time basis, and it has reduced its valuation multiples to reflect the current environment.”
Some investors are becoming cautious about nonessential REITs. According to Stanger, Blackstone saw investor withdrawals from its REITs estimated at $3 billion in the third quarter, compared to $711 million in the first quarter. Blackstone said it raised $4.2 billion in the third quarter, including reinvestment dividends. Blackstone says the bulk of those withdrawals came from investors based in Asia, as they were looking for “a way to address liquidity and leverage concerns.”
Blackstone president Jonathan Gray said on an earnings call earlier this month that redemptions could soon exceed new funding. “We may see negatives sometime,” he said.
Stanger estimates that a total of about $31 billion will be invested in these funds this year, down from earlier estimates of $45 billion.
Nontraded REITs allow investors to withdraw cash, but sponsors can freeze redemptions if too many investors want to withdraw cash at the same time. Sponsors typically allow investors to withdraw 2% of a fund’s net asset value in one month and 5% in a quarter, although these levels can be adjusted by the sponsor’s board of directors.
So far, none of the non-traded funds have achieved redemption, but that could change if more investors start heading for the door. “We’re going to test it a little bit,” says Stanger chief executive Kevin Gannon.