Investment prices have been shifting quickly over the last year, and one sector of the market where that has been true is real estate. As rates rise and inflation takes a chunk out of the income available to investors to put toward saving, publicly traded real estate investment trusts (REITS) have seen their prices decline. In contrast, nontraded REITs have had positive returns. In The Wall Street Journal, Gregory Zuckerman and Peter Grant wonder if investors in nontraded REITs aren’t in for a nasty surprise when losses in nontraded REITs catch up to those in their publicly traded counterparts. They write:
It has been a terrible year for many publicly traded real-estate investments as rising interest rates and falling property prices hit the market. The MSCI US REIT Index, which tracks publicly traded REITs, is down about 26% this year.
But it has been a strong year for a type of investment especially popular with individuals: nontraded real-estate investment trusts. Some of these funds have returned about 10%. The difference worries some investors—and it could cause losses for those who buy these now thinking that nontraded REITs are immune to the market selloff.
“With nontraded REITs increasing their valuations while markets are punishing public REITs, I’d run for the hills,” said Allan Roth, founder of Wealth Logic LLC, a financial planning firm based in Colorado Springs, Colo.
Nontraded REITs are like public REITs in that they buy 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 nontraded REITs raise money directly, mostly from individuals through financial advisers. These individual investors are able to cash out only periodically through the funds’ sponsors.
The valuations differ because public REITs are valued at whatever their shares are trading for on the stock market. Nontraded REITs are valued monthly by their sponsors working with independent appraisers analyzing how much the commercial property they own is worth.
Nontraded REITs are part of a booming market for private investments that attracted individuals and institutions eager for higher yields, hot startups and funds that appeared to be less volatile than public markets. Nontraded REITs have raised more than $92 billion over the past five years, according to Robert A. Stanger & Co., an investment-banking firm that tracks the market.
These funds have been huge moneymakers for firms such as Blackstone Inc., Starwood Capital Group and others. The Blackstone Real Estate Income Trust, known as BREIT, has raised more than $62 billion while the Starwood Real Estate Income Trust, or SREIT, has raised about $12.7 billion, according to Stanger.Withdrawals from the Blackstone Real Estate Income Trust rose to an estimated $3 billion in the third quarter.
Both funds are up about 10% this year including the rise in share price and dividends. The 26% decline in the MSCI REIT index also includes 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 borrowing costs for the funds.
Some investors are asking why the value of nontraded REITs continue to rise. For one thing, values of apartment buildings have declined 14% in the past 12 months according to real-estate analytics firm Green Street, while industrial-property values are down 9%. Even e-commerce-related distribution centers are seeing softening demand. Investors are worried that prices for office buildings could decline as people continue to work from home.
Meanwhile, institutional investors have been selling interests in private real-estate funds, according to specialists who focus on secondary-market trading of these investments, and they have been willing to accept prices that sometimes are as much as 10% below net asset values from the third quarter, the most recent valuations.
“The selling is in anticipation of potential future drops in value,” says Phil Barker of ACRE Solutions LLC, which helps big investors buy and sell interests in private real-estate funds in the secondary market, though he doesn’t deal with nontraded REITs. “Interest rates and inflation are up, public real-estate prices are lower and private real-estate values will eventually react.”
Action Line: Time will tell how this all turns out, but it could be a cautionary tale for investors about patronizing opaque investments. Click here to subscribe to my free monthly Survive & Thrive letter, where I’ll push you to achieve the personal and financial security you desire for your family.