Non-traded REITs may provide financial advisors with an opportunity to access real estate.
What are non-traded REITs?
Non-traded real estate investment trusts (REITs) are registered, open-end investment vehicles used to invest in real estate assets. Also recognized in the industry as public non-traded REITs, non-listed REITs, or NAV REITs, these vehicles, unlike their exchange-traded counterparts, are not listed on public exchanges and are thus considered to be illiquid investments. Non-traded REITS are typically purchased through a broker-dealer.
Though they are not available on exchanges, most non-traded REITs are registered with and must file reports with the US Securities and Exchange Commission (SEC).1 Like most REITs, non-traded REITs must also comply with the IRS requirement that they distribute no less than 90% of the trust’s taxable income to shareholders each year.2
These structures are typically sought out by certain investors seeking income and/or diversification; they also provide direct exposure to private real estate or commercial real estate assets, such as multi-family housing, industrial property, or office buildings.
What do non-traded REITs typically invest in?
Like REITs in general, non-traded REITs invest in real estate properties across various sectors. Some non-traded REITs tend to be more specialized, concentrating their investments into a single sector, while others target broader diversification across property types and industries. Examples of real estate sectors that REITs may invest in include:
Residential – apartment buildings, condominiums
Commercial – hotels, storage centers, office buildings, retail
Industrial – warehouses, factories
Infrastructure – data centers, telecommunications facilities
Other – healthcare facilities, long-term care facilities
Typically, because of their focus on income, REITs often target and manage “core” real estate properties with relatively stable cash flows, which tend to be collected as rents from property tenants. Some REITs will invest in mortgage assets and instead derive their cash flows from interest payments.
How do non-traded REITs work?
Shares in non-traded REITs are purchased directly, generally through a financial advisor or broker-dealer. Subscriptions can be offered at regular periods, typically monthly.3 Shareholders may receive periodic dividends and non-traded reits may provide a periodic redemption program.However, neither distributions nor redemptions are guaranteed and may vary depending on the offering terms. Advisors should seek to understand any redemption limits, penaltities, or gates that exist for each offering.
What’s the difference between non-traded REITs and publicly traded REITs?
The major differences between non-traded REITs and publicly traded REITs are the way that shares are valued and their liquidity. Publicly traded REITs can be bought or sold by market participants at any time via public exchanges, making them much more liquid; like stocks, share prices are determined by the market and are thus susceptible to broader market volatility.Because non-traded REITs are not traded on an exchange, they may experience less day-to-day volatilty in comparison to publicly traded REITs. Nevertheless, advisors should remember that a lack of day-to-day volatility may not be indicative of a non-traded REIT's valuation and performance.
It’s important to note that some kinds of non-traded REITs, often called life cycle REITs, do not offer periodic redemptions, and liquidity is only offered to shareholders at the end of a specified period and/or when the REIT’s underlying assets are sold or the REIT is listed on a public exchange.5 Institutional investors and/or accredited investors may also have access to private REITs, which differ from non-traded and publicly traded REITs. Private REITs are exempt from SEC registration and are generally illiquid, less transparent, and potentially more costly for these investors than public REITs.
What are some of the the costs and risks associated with non-traded REITs?
Advisors should be aware of costs and risks associated with investing in non-traded REITs,7 some of which are outlined below.
Lack of liquidity – Non-traded REITs are illiquid investments; therefore, shareholders may be forced to hold their shares until a liquidity event or until redemption opportunities are offered. Redemptions are generally limited in the frequency and amount available to shareholders and can be paused or discontinued at any time. Terms may also require that redemptions are only issued at a discount to the investor's principal investment, which can negatively affect the investment’s potential returns.
High fees – Non-traded REITs are associated with higher upfront fees than many exchange-traded products, representing up to 15% of the offering price.6
Source of distributions – Though the distributions potential tends to be a key reason why advisors may consider non-traded REITs for their portfolios, some of these distributions, especially early in the life cycle, may come from borrowing or principal rather than the operations of the investments.
Lack of transparency – Valuations of non-traded REITs, and their underlying assets, may be less transparent, especially compared to publicly traded REITs, which are driven by the market.
Conflicts of interest – REITs can be managed by external investment advisors, and therefore, the incentives may not always align with shareholders’ investment goals.