Publicly traded real estate investment trusts (REITs) offer investors many potential benefits, including the ability to invest in flourishing commercial real estate sectors coupled with the advantages that often come with publicly traded stocks, such as dividend, yield, appreciation and portfolio diversification.
Since these stocks are bought and sold in public markets, liquidity isn’t an issue like it can be with direct property ownership. However, investors who want to divest their equity shares of non-traded REITs face a much different outlook.
In this article we’ll take a closer look at how non-traded REITs can be bought or sold in secondary markets.
Liquidity of Non-Traded REITS
Many investors have sought yield through publicly traded REITs because they straddle dual markets -- commercial real estate and public stock markets. According to the National Association of Real Estate Investment Trusts, there were 179 REITs trading on the New York Stock Exchange in September of 2021. These companies had a combined market valuation exceeding $1.3 trillion.1
Private REITs, however, aren’t traded on public markets, which makes them highly illiquid investments. Equity shares of non-traded REITs are typically sold only to institutional and accredited investors that are better situated to withstand the longer holding times and investment illiquidity common with these financial instruments.
Furthermore, these securities are exempt from the strict SEC regulations and oversight to which publicly traded REITs must adhere.2 A primary requirement is that private REITs have a board of directors or trustees. They don’t have to publish performance reports or disclosure requirements common with publicly traded investments.
Since there are requirements to issue performance data and metrics, it can be difficult to provide a valuation of shares of non-traded REITs once the REIT offering is closed to investors. Non-traded REITs also often come with higher upfront fees that can total as much as 15 percent of the offering price, and there are usually ongoing fees such as management and new acquisition costs.3
Combined, all these factors can make it extremely difficult for you to divest your shares of a non-traded REIT.
Divesting REIT Shares in the Secondary Market
Redemption programs for your shares in non-traded REITs are limited. There’s typically a minimum holding period prior to exit, such as seven to 10 years, or the REIT will issue an initial public offering and begin trading on a national exchange.4
Getting out early, however, can prove quite problematic. These investment vehicles are privately managed, so the board can choose to suspend its redemption program or cut dividends if the REIT is struggling financially.
Investors can turn to the secondary market in an attempt to divest their equity shares; however, doing so could result in a substantial loss in investment capital since third-party buyers on secondary markets are typically seeking steep discounts.5 There also have been online auction sites cropping up in order to pair REIT investors who want out with potential buyers.6
The Bottom Line
The lack of transparency with private and non-traded real estate investments trusts brings much higher risk than that associated with publicly traded REITs, which are required to adhere to stringent SEC oversight and regulations.
Publicly traded REITs are transparent and liquid, and they publish performance metrics that can help manage investment risk. Investors who purchase equity in private or non-traded REITs, however, are basically locking themselves into their investments unless they choose to divest their shares on secondary markets, which could result in deep losses of investment capital.
Investors considering shares of private non-traded REITs should carefully weigh how the investment fits within their overall strategy, risk profile, and investment experience since divestiture through secondary markets is rarely a viable option.
1. REIT Industry Financial Snapshot, Nareit, https://www.reit.com/data-research/reit-market-data/reit-industry-financial-snapshot
2. Guide to Private REIT Investing, Nareit, https://www.reit.com/what-reit/types-reits/guide-private-reits?gclid=CjwKCAjwiY6MBhBqEiwARFSCPl6BuV0J04lfBOdWfyCcW37FW_610b3Q8EgjSZi01LTDg4WKD8EY0hoCo_kQAvD_BwE
3. Investor Bulletin: Non-Traded REITs, SEC, https://www.sec.gov/oiea/investor-alerts-bulletins/ib_nontradedreits.html
4. Investor Bulletin: Non-Traded REITs, SEC, https://www.sec.gov/oiea/investor-alerts-bulletins/ib_nontradedreits.html
5. Non-Traded and Private REITs, SSEK Securities Law Firm, https://www.investorlawyers.com/non-traded-and-private-reits.html
6. Adding Liquidity to Locked-Up Non-Traded REITs, Investment News, https://www.investmentnews.com/adding-liquidity-to-locked-up-nontraded-reits-38015
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.