Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales

Nov 21, 2017 @ 1:36 pm

By Bruce Kelly

Sales of nontraded real estate investment trusts are headed for their worst year since 2002, with the industry on track to raise just $4.4 billion in equity in 2017, about $100 million less than a year earlier, according to data from Robert A. Stanger & Co.

Making matters worse for the industry is that one newcomer to selling nontraded REITs, The Blackstone Group, has the highest sales for the year to date through September. Blackstone had almost $1.4 billion in sales with its new REIT, the Blackstone Real Estate Income Trust, over the first nine months of the year, according to Stanger.

The new Blackstone REIT began selling this year and was offered mainly through wirehouses, which traditionally have not sold nontraded REITs.

That means traditional nontraded REIT managers – including Griffin Capital Co., Carter/Validus Advisors, Cole Capital and others – will likely raise about $3 billion this year, about one third less than the 2016 total. And independent broker-dealers are struggling without the lucrative commissions formerly generated by product sales.

In the face of the slump in REIT sales and new regulations, many traditional REIT managers are turning to other products, including interval funds.

2013 PEAK

In 2002, $3.8 billion worth of nontraded REITs were sold. Nontraded REIT sales were $11.5 billion in 2007, according to Stanger, just as the real estate crash was beginning. Sales of nontraded REITs hit their peak in 2013, when independent broker-dealers sold $19.6 billion of the products.

Public Non-Listed REIT Fundraising 2007 – 2017e
Source: The Stanger Market Pulse

It clearly was a different time for the industry. American Realty Capital, controlled by Nicholas Schorsch, was selling a variety of REITs and raising record amounts of money. Brokers were routinely charging commissions of 7% for sales of illiquid REITs, which also were drawing scrutiny from regulators for high commissions and complex fee structures.

Sales of nontraded REITs began falling in 2014, totaling nearly $4 billion less that year, with sales declining about $5.6 billion in 2015 and 5.5 billion in 2016, according to data from Stanger.

A number of factors contributed to the slowdown in sales of nontraded REITs.

In 2014, one of the partners at ARC, Brian Block, was fired from a giant listed REIT controlled by Mr. Schorsch, American Realty Capital Properties, for his role in an accounting scandal at the company. Some broker-dealers halted sales of ARC REITs at the time and slowed the sale of ARC products dramatically.

Earlier this year, a jury in federal court in New York found Mr. Block guilty of fraud and he was later sentenced to 18 months in prison.

NEW RULES

New securities industry rules and regulations, including the Department of Labor's fiduciary rule, have hurt sales of high commission products like nontraded REITs. The fiduciary rule has flattened the levels of commissions that brokers charge clients for products such as mutual funds.

The Financial Industry Regulatory Authority also recently put into place a new rule, known as 15-02, that makes pricing of illiquid securities like nontraded REITs more transparent to investors. In the past, client account statements showed illiquid securities like REITs at the value they were bought by the client and did not subtract commissions, which were high.

"The impact of 15-02, Finra's net pricing rule, along with the hangover of the DOL fiduciary rule, has impacted sales," said Kevin Gannon, managing director at Stanger. "The main bright spot has been Blackstone."

With the DOL fiduciary rule flattening commissions, many REIT managers began selling T shares, which cut the upfront load by more than half. After initially paying a 3% commission, the broker is then paid up to 7% over several years. An annual commission of 80 basis points is paid from the return generated by the REIT manager.

Some brokers don't like getting paid over several years instead of getting 7% at the time of the sale, Mr. Gannon added. "In response to 15-02, the past commission structure has given way to the deferred commission structure, which may be less appealing to registered representatives who had grown accustomed to the upfront commission on this class of product over the years," he said.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

Dynasty's Penney: The professionalization of the RIA industry

The RIA profession is evolving rapidly, but why and how? Shirl Penney of Dynasty Financial examines how the industry is growing and consolidating and what's next.

Latest news & opinion

Small broker-dealers seek legislative relief from annual audits

Bills introduced in House, Senate would remove PCAOB requirement.

Meet our new 40 Under 40s

For a fifth year, InvestmentNews is proud to shine a spotlight on the amazing accomplishments and potential of top young financial professionals.

Merrill re-evaluates commission ban in retirement accounts

The wirehouse's wealth management group announces a fresh look at the ban now that the DOL rule is on the brink of death.

10 biggest retirement mistakes

Adhere to enrollment deadlines and distribution rules or pay a hefty penalty.

DOL fiduciary rule on brink of death as key deadline passes

Justice Department didn't petition the Supreme Court to rehear the case. A mandate from the 5th Circuit would finally lay the fiduciary rule to rest.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print