Advisor Group said it is temporarily halting the sale of products that invest in real estate as a result of valuation issues caused by the COVID-19 pandemic, making it the second giant network of registered reps and financial advisers to do so.
In a similar move earlier this month, LPL said it was shutting down sales of some investment products that contain less liquid and hard-to-price assets such as real estate.
Leading up to the 2008 financial crisis, independent broker-dealers were big sellers of illiquid real estate investments that later seized up and saw valuations plummet. The moves to suspend the sales of such products by LPL and Advisor Group can be seen as the industry's wariness about making that same mistake again.
"Due to the negative impact of the coronavirus (COVID-19) pandemic on the ability of private funds, which are the underlying investments of real estate interval funds, and [real estate investment trusts] to produce a [net asset value] that is reflective of current market conditions on a timely basis, Advisor Group is temporarily suspending all real estate interval funds and NAV REITs [sales]," according to a memo sent to advisers this week.
A spokesperson for Advisor Group did not respond to a request for comment by deadline.
Like LPL Financial, Advisor Group is a massive brokerage network, with nine broker-dealers and more than 11,000 reps and advisers under its roof. Reps sell such real estate products to investors looking for steady yields.
Accurate valuations of real estate during the current economic and health crisis are the issue, according to the memo. "Real estate valuation methodologies are designed to operate over long periods of time, while the extent and speed of recent economic and market developments is unprecedented," according to Advisor Group. "As a result, there is an increased risk that your clients may be paying a higher premium for these funds and REITs if we continue to allow new purchases."
Advisor Group has temporarily halted the sale of two interval funds, the Griffin Institutional Access Real Estate Fund and the BlueRock Total Income+ Real Estate Fund. It has also suspended sales of five so-called NAV real estate funds: Jones Lang LaSalle Income Property Trust Inc., Black Creek Industrial REIT IV Inc., Blackstone Real Estate Income Trust Inc., CIM Income NAV Inc. and Hines Global Income Trust Inc.
Interval funds are named for their limits on the timing of redemptions, which are stricter than those for publicly traded investment funds or real estate trusts. NAV REITs also have less liquidity than publicly listed real estate trusts.
In its memo, Advisor Group said that it was also keeping a watch on other alternative investments, which are often made up of less liquid holdings, but that it had made no decision yet to halt sales.
"I believe the market was already reacting to the COVID-19 matter by easing on fundraising," said Kevin Gannon, CEO of Robert A. Stanger & Co. Inc., which tracks the sales of illiquid real estate investment products. "The reaction was a little extreme but certainly has a rational basis. That is, will the NAVs be adjusted fairly to reflect market conditions for new investors, or will there be a lag implying that investors in April might not buy securities at an appropriate price?"
"Investors can always make a decision to buy or not buy a security at a given price," Gannon added.
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