Nontraded REITS should be a nonstarter for clients: Green Street

Research firm says publicly traded trusts are the superior investment; ‘egregious' upfront costs

Mar 29, 2012 @ 4:13 pm

By Dan Jamieson

Forget the new breed of nontraded REITs, says Green Street Advisors Inc. Investors are far more likely to be better off with publicly traded REITs, the research firm said in a report released Wednesday.

Regulatory scrutiny has forced sponsors of nontraded REITs to address issues surrounding valuations, illiquidity, high fees, dividend payouts and conflicts, the report said.

One crucial change: the introduction of daily net-asset-value estimates by several sponsors, as better pricing transparency might end the illusion of share-price stability, Green Street said.

“Since the shares don't trade, the share price investors see on their statements every quarter doesn't fluctuate,” the company said. That stability has been “one of most bizarre ‘advantages' touted by nontraded-REIT sponsors.”

In addition, “egregious” upfront costs of 7% to 10% on nontraded REITs should come down to 1% to 3%, the report said, and management fees of around 1% will drop, as well.

Questionable dividend yields of 5% to 10% are likely to fall closer to the 3.3% yield for publicly traded REITs.

Green Street said nontraded REITs have gotten something right, however: low leverage.

“Very few of them were forced into [taking on] expensive debt [or] selling properties on the cheap [or] issuing equity on an NAV-dilutive basis” during the financial crisis, the research firm said.

Nevertheless, “for most investors under most circumstances, publicly traded REITs will represent a superior investment vehicle, compared to even the ‘new breed' nontraded REITs,” the report said.

Green Street counts approximately 70 public nontraded REITs that own $85 billion in assets.

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