As the equities market sputters and fixed income continues to eke out mediocre yields, investors are increasingly finding an alternative in nontraded real estate investment trusts.
More than $4 billion flowed into nontraded REITs in the three-month period ended March 31, according to data from Robert A. Stanger and Co. Inc. and the Investment Program Association. That's a pickup from the first quarter of 2013, which saw inflows of about $3.9 billion. But overall, 2013 was a banner year for nontraded REITs, with total flows reaching $19.6 billion, according to the IPA. In 2012, nontraded REITS brought in $10.3 billion in retail investor capital flows.
“This is a strong indication that investors remain bullish on these products,” said Kevin Hogan, president and CEO of the IPA.
A number of factors are driving demand, including the sideways equities market, Mr. Hogan said. Traditionally, nontraded REITs offer relatively low correlations to stocks, making the assets an appealing diversifier.
Weak yields in the bond market have also been a driver of nontraded REIT inflows. In 2013, the average annual distribution of nontraded REITs was 7.26%, better than on most bonds, according to Blue Vault Partners, which researches nontraded REITs.
“Real estate does come with some risks, so the yields need to be attractive,” Mr. Hogan said.
Meanwhile, the gradual uptick in the U.S. economy is boosting demand for office space and reinflating real estate values, a boon for many REIT issuers, Mr. Hogan said.
“Interest rates are low, and occupancy rates are high. This is a perfect storm for REITs,” said Mr. Hogan, who expects the pace of inflows to remain strong through 2014.
There are, however, reasons that nontraded REITs may not be an ideal choice for investors. The products typically involve upfront fees as high as 10% in some cases, and the typical nontraded REIT requires an investor to tie up his or her assets for between five and seven years, he said.
Those who want exposure to real estate while enjoying greater liquidity could consider publicly traded REITs, which can be bought and sold like stocks.
“It's important for investors to realize that a non-listed REIT investment requires a longer time horizon,” Mr. Hogan said.