Assets in nontraded real estate investment trusts have nearly doubled this year, compared with 2012, and the sector is likely to continue growing next year.
Nontraded REITS are estimated to bring in about $20 billion in retail investor capital flows by the end of this year, compared with $10.3 billion in 2012, said Kevin Gannon, president and managing director of investment bank Robert A. Stanger & Co. Inc.
That amount is the highest since 2007, when nontraded REITS took in $11.5 billion. As the nontraded REIT industry grows, more products are investing in niche areas of real estate.
“A lot of what we're seeing is firms getting more and more specialized as the space grows up,” said Daniel Wildermuth, founder and chief executive of Kalos Financial Inc. “Now you're seeing things that are focused on particular offerings.”
Mr. Gannon and Mr. Wildermuth joined Mark Goldberg, president of Carey Financial, on an InvestmentNews webcast Wednesday focusing on what is next for nontraded REITs.
Nontraded REITs continue to face a series of regulatory challenges in the market.
For example, concentration limits vary from state to state, making it difficult for broker-dealers who work with financial advisers nationwide. In addition, much of the details about deals can be hard for individual investors to understand.
“These deals are blind pools that are growing at a dramatic pace,” Mr. Gannon said. “It's always quite a bit of a moving target.”
However, as advisers invest in nontraded REITs for their clients at an increasing rate, the industry has adopted a more-cooperative stance in working with regulators toward improved transparency, Mr. Goldberg said.
As that improves, investors will benefit.
“There's been a reduction in fees, an increasing adoption rate, performance and, ultimately, better processing and administrative work,” Mr. Goldberg said. “I think all these elements are trying to improve sales.”
Moving into next year, Mr. Wildermuth said that there will continue to be opportunities in the market, particular in more focused areas, such as health care real estate. Some areas of commercial real estate also are strong, depending on the city.
By contrast, investments in office buildings are weak as unemployment remains relatively, and retail is generally underperforming.
The potential for rising interest rates in the coming year is unlikely to create much of a negative effect for investors interested in nontraded REITs, Mr. Gannon said.
“While there might be some uptick and some movement upward, we don't think it's going to be in a manner that would wreak havoc on the real estate space suddenly,” he said. “It will have an impact, but it will be slight.”
Overall, the number of products in the nontraded REIT sector is increasing, and the number of offerings likely will grow next year.
“I think the space continues to get better, and there's more and more options,” Mr. Wildermuth said.
“The big things that we're seeing out there is, there's more creativity, and the level of professionalism has really gone up,” he said. “Anybody who's going to be successful has to clear a pretty big hurdle at this point.”