Though sometimes considered the stepchild of the real estate investment trust industry, non-traded public REITs are proving to be a popular new source of investment capital for the commercial real estate industry. Non-traded public REITs file stock offerings with the Securities and Exchange Commission, but their stock is not traded on an exchange.
The SEC last year alone approved 12 new non-traded REIT offerings, the most in any one-year period since the industry's inception in 1990.
Publicly registered, non-traded REITs represent a small sector compared with their larger publicly traded brethren. Today there are 48 non-traded REITs with an estimated $69.6 billion in assets under management, compared with the $271.2 billion in assets managed by publicly traded REITs.
Created more than 30 years after the REIT Act of 1960, non-traded REITs were born out of the limited partnership industry. Shares in these firms are marketed to individual investors via financial intermediaries, including registered broker/dealers and financial advisors, and are not traded on an exchange.
To say they got off to a slow start would be an understatement. It took more than seven years for the top five companies in the sector to collectively raise $1.5 billion in capital.
Starting in 2000, however, the industry began taking off. From 2000 to 2010, the number of sponsors, or companies, offering non-traded REIT products grew from six to 29, while the total products in the industry grew from 13 to 71.
As of December 2009, total assets under management for all non-traded REITs represented 20% of the total market capitalization for all publicly registered REITs. That market share compares to just 3% of the market 10 years ago and illustrates the popularity these products have experienced since 2000.
One reason is investor demand for steady, if not sterling, returns. Yields from non-traded REITs have performed better than publicly traded offerings. Non-traded REIT yields averaged 6.53% for all of 2009, compared with an average yield for publicly traded REITs of 4.53%.
Bevy of new offerings
There is no shortage of new non-traded REIT offerings. Based on current fundraising trends, sales of non-traded REITs could reach as high as $7 to $8 billion in 2010. That total assumes that the listing of Piedmont Office Realty Trust, the former Wells REIT, on the New York Stock Exchange could trigger a reinvestment opportunity and place as much as $1 billion to $2 billion back into the market.
Following Piedmont are other non-traded REITs ready to pump fresh capital from listing on an exchange back into the property market in 2010. For example, Inland Western Retail Real Estate Trust became a non-traded REIT in 2003 and is the next closed, non-traded REIT program poised to either list its shares on an exchange or merge with another entity.
Another opportunity for the industry to sustain or even increase sales in 2010 is through the launch of new products by national financial services firms, such as ING and Merrill Lynch. These offerings are expected to feature lower fees and increased liquidity than the current crop of offerings.
Finally, we estimate that there are about 100,000 financial advisors who can offer non-traded REITs to their clients, but less than 20% of these advisors are recommending non-traded REIT programs to their investors.
This gap is due to a limited understanding of the product line, limited awareness of how these products work compared with traditional investments, and a hesitation to recommend these products due to their illiquid, long-term investment time horizons.
We continue to believe that enhanced transparency from independent data sources is a must for these financial advisors. Along with support from industry organizations such as the Investment Program Association (IPA) and the Real Estate Investment Securities Association (REISA), the non-traded REIT industry has the opportunity to grow and become a more mainstream asset class over the next 10 to 20 years.
Vee Kimbrell and Stacy Chitty are managing directors at Blue Vault Partners, an Atlanta research firm. Contact: [email protected] and [email protected].