Are nontraded REIT sales back from the dead?

Sales could hit $5.1 billion this year, up from $4.2 billion in 2017, according to Robert A. Stanger & Co. Inc.

Jul 12, 2018 @ 4:37 pm

By Bruce Kelly

Signs of life are creeping back into the moribund market for nontraded real estate investment trusts.

While sales are down 18.5% the first half of this year when compared to 2017, fundraising has increased for three consecutive quarters, according to investment bank Robert A. Stanger & Co. Inc.

Stanger estimates nontraded REIT sales this year could reach $5.1 billion. That's would compare to $4.2 billion last year and $4.5 billion in 2016.

A combination of new managers entering the market after the recent success of the Blackstone Group's nontraded REIT with old nontraded REITs moving towards liquidity events like mergers and listings should help boost sales in the second half of 2018 and into next year, said Kevin Gannon, president and managing director at Stanger, an investment bank that works with nontraded REITs and their managers.

Mr. Gannon said he expects fund raising for nontraded REITs "to accelerate" as newcomers like Starwood Capital Group, Nuveen and Oaktree Capital Management begin selling products during the second half of the year.

He is also sanguine about $10 billion of mergers, listings and liquidations, along $1.5 billion in share redemptions from investors over the past year. "These actions speak volumes about nontraded REITs meeting the liquidity expectations of investors," he said.

Mr. Gannon's anticipation of better days ahead for nontraded REITs, sold almost exclusively by independent broker-dealers, comes after a bruising five years during which sales have gone straight down.

The Department of Labor's now-defunct fiduciary rule, and new securities industry account statement rules for greater clarity in the prices of products, two years ago forced nontraded REITs —marketed as higher-yielding investments — to sell different share classes and sliced their commissions. The industry's largest sponsor, American Realty Capital, revealed an accounting scandal in 2014 at a related company and a year later stopped selling new REITs.

Since the top of the market in 2013, when ARC was the dominant nontraded REIT manager and brokers sold $19.6 billion in REITs, sales of the product have collapsed.

Nontraded REIT sales dropped $9.6 billion, or 46.4%, between 2013 and 2015, according to Stanger. Some in the industry have pointed to the high price of commercial real estate as dampening REIT sales. Others have said the new industry pricing rules and the DOL fiduciary rule, which tamped down incentives like high commissions, as the reasons behind the fall off in REIT sales.

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