In the wake of the historic real estate meltdown, it is easy to make a case for investing in non-traded real estate investment trusts.
In the wake of the historic real estate meltdown, it is easy to make a case for investing in non-traded real estate investment trusts. “Right now, there is a pretty strong buying opportunity because prices have reset and there are far better values out there,” said Michael Schwartz, chief executive of Strategic Storage Trust Inc., a Ladera Ranch, Calif.-based company that invests primarily in self-storage facilities.
Indeed, a glance in just about any direction across the country's real estate landscape supports the argument that prices have fallen to levels that can be considered attractive to investors. So it comes as no surprise that the non-traded-REIT industry is starting to buzz with activity.
“We've held about 60 meetings in the last six or seven months with people who are now looking at the space as a viable place to raise capital,” said Kevin Gannon, managing director with Robert A. Stanger & Co. Inc., a Shrewsbury, N.J.-based investment-banking firm that specializes in real estate and REITs.
Year-to-date through June, the non-traded-REIT industry had raised $2.9 billion from investors looking to get in at or near the bottom of the market, according to his research.
To be sure, the pace of inflows is still down compared with last year, which saw full-year inflows of $9.8 billion, and 2007, which experienced inflows of $11.7 billion.
But as Mr. Gannon explained, those were markets in the midst of different circumstances.
In 2007, many mature funds were liquidated, so a lot of investment capital was rolled over into newer funds. The story last year involved looming investment deadlines for some large funds, which is a situation that typically inspires investors to rush in at the last minute, according to Mr. Gannon.
Non-traded REITs are uniquely positioned for the current environment because of the general investment structure, which involves owning the hard assets and generating income through rent.
Publicly traded REITs, by comparison, can own securities in most real-estate-related businesses, in-cluding homebuilders. Traded REITs also offer daily pricing and liquidity, much like mutual funds.
Non-traded REITs, on the other hand, typically impose investment lockup periods of between five and 10 years.
“It's up to the adviser to make sure the clients are well-matched to the investment, and non-traded REITs are not for everyone,” said John Towle, chief marketing officer at Cole Capital Advisors Inc., a non-traded-REIT manager in Phoenix with $4.5 billion under management.
But for investors who are willing to lock in their cash for a few years, this could be rare opportunity to buy low into an asset class that has always been designed to be held, not flipped for a quick buck.
The 7% front-end loads and total fees that can hover around 13% offer a pretty strong incentive to hold for the duration just to spread out the fees.
Another incentive is good, old-fashioned dividend income, which usually comes in at close to 7% an-nually. Like traded REITs, the structure requires the funds to pay out 90% of their income in the form of dividends.
The ultimate liquidation — when the properties generating rental income are sold off — is also designed to provide the final boost of the investment's total return.
Minimum investments can be as low as $1,000, and the public--offering period for non-traded REITs usually lasts two or three years. So it is a safe bet that any new fund taking investments isn't saddled with legacy properties that might have been overleveraged or purchased at the market peak.
The tighter credit market also offers investors some added protection against a new fund's relying too much on leverage to build a portfolio.
A new Investment Insights -column appears every Monday on InvestmentNews.com. E-mail Jeff Benjamin at -jbenjamin@investmentnews.com.
