Nontraded REITS headed for another boffo year

Sales expected to hit $20 billion as low interest rates and liquidity events spark industry

Jun 26, 2014 @ 11:20 am

By Bruce Kelly

nontraded REITs, liquidity events, interest rates, internal rate of return, independent broker-dealers
+ Zoom

Nontraded real estate investment trusts are on their way to a second consecutive year of strong sales that will likely reach $20 billion in 2014.

That's after sales of $19.6 billion in last year, double the amount of 2012, according to Keith Allaire, managing director of Robert A. Stanger & Co. Inc., who made a presentation Thursday morning at IMN's annual nontraded REIT industry symposium in New York.

Sold primarily by independent broker-dealers, nontraded REITs should continue to benefit from low interest rates. Nontraded REITS are currently producing yields on average of 6.4% and thus attract investors seeking income.

(First quarter flows were strong)

The nontraded REIT industry should also benefit from a wave of mergers and listings through the end of next year. When a nontraded REIT has such a liquidity event, registered reps will often advise clients to sell the REIT and invest in a new, nontraded REIT.

Performance of nontraded REITs over the past couple of years has been strong, Mr. Allaire said. Since 2012, the internal rate of return for nontraded REITs bought by investors from the middle of an offering period to a liquidity event is 10.5%, he said.

(Related: Are nontraded REIT commissions headed for a fall?)

“There have been 15 liquidity events since 2012 and only four didn't return original offering price,” Mr. Allaire said.

“Nontraded REITs are the incubator for listed REITs,” Mr. Allaire said. “The industry is about even with where we were last year, and we're projecting about $20 billion in sales this year.”

“The hot spots in the market are healthcare, hospitality and retail,” he said. “A couple of years ago there was virtually no retail (REITs) in our space.”

Mr. Allaire said there were currently 11 nontraded REITs in registration, waiting to become effective and sold by registered reps.

There are currently 23 sponsors, down a bit from the past couple of years as small sponsors have exited the business. Other sponsors are waiting to see the effect of a new regulation requiring disclosure on client account statements by brokerage firms about the true value of REITs and the cost of commissions, Mr. Allaire said.

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