Investors and advisors continue to dump nontraded REITs

Worried about high interest rates and a shakeout in commercial real estate, investors and their financial advisors continued to punt their share of nontraded real estate investment trusts, taking advantage of current programs at some illiquid REITs that allow clients to sell their shares back to the company in a process the industry calls share redemption.

Just last month, the Starwood Real Estate Income Trust Inc., with $9.8 billion in assets and also known as SREIT, said it was cutting back the amount of shares it would buy back from its retail customers each month as it waits for the market for commercial real estate to rebound and interest rates to drop. Beginning July, the quarterly redemption of SREIT will decrease to 1% of stockholder net asset value - NAV - from 5%.

While investors are redeeming nontraded REIT shares and cashing out from such investments, the trusts managed to keep up with investor demand in May, noted one research analyst.

"Following SREIT’s announcement last month, we saw a 65% average surge in monthly redemption requests across the top NAV REITs that have reported, with some seeing requests more than doubling versus April," wrote David Inauen, head of research at Robert A. Stanger & Co. Inc., which counts ten such nontraded, NAV REITs in its group to cover.

"However, despite investors actively hitting the redemption button, we estimate that all of the other top NAV REITs with monthly redemption programs answered the call by fully satisfying all redemption requests in May, in some cases exceeding the stated capacity limits of their redemption programs," Inauen wrote in a research note this week.

SREIT reported that it expects the stricter redemption limits to be temporary, lasting six to twelve months, according to Stanger, and that it satisfied only 3% of an estimated $1.0 billion in redemption requests in May.

"When there is a finite amount of liquidity for a nontraded REIT, there are benefits to being among the first to reach the exit to redeem shares," said John Cox, CEO of Cox Capital Partners, which invests in non-traded alternatives in the secondary market via a proprietary fund. "Those investors are more likely to get more shares out than someone who waits to redeem."

"Patience is rarely rewarded when it comes to these gaited type of redemptions," he added.

Nontraded REITs are public companies but aren’t registered on any public exchanges and don’t trade. Financial advisors typically sell them to clients looking for steady yields.

As InvestmentNews reported in November, sales of non-traded REITs tanked last year, with the industry raising just $9 billion through September after successive years in which it took in more than $30 billion in new capital.

The industry is facing a series of negatives: sharply rising interest rates, headlines about half-empty office buildings, and investors pulling their money from products, including SREIT.

The larger capacity to buy back significant amounts customer shares from clients was a key selling point for financial advisors when selling this generation of nontraded REITs, with the Blackstone Real Estate Income Trust Inc. the first such REIT to launch in 2016. SREIT followed two years later.