January was worst month for retail nontraded REITs sales since 2009

In January, retail investors and their financial advisors ran away from nontraded real estate investment trusts, which were one of the hottest investment products for the past five years but showed signs of wear and tear as 2022 came to a close.

According to investment bank Robert A. Stanger & Co. Inc., January nontraded REIT sales to retail investors totaled only $596 million, the lowest monthly level since December 2009, in the immediate wake of the credit crisis.

The sales news for nontraded REITs was not all bad, Stanger noted in a research note. At the start of January, one institutional investor, the Regents of the University of California, invested $4 billion into the Blackstone Real Estate Income Trust, which had been under intense scrutiny as a result of investors pulling cash out of the company through a process called redemptions. That investment boosted the total for nontraded REITs to $4.6 billion for the month, the second best recorded by the investment bank.

That investment ensured that the University of California will receive a minimum annualized net return of 11.25% over the six-year holding period of its investment.

But retail investors are the common target for such REITs, which promise low volatility and steady yields. Institutions like colleges, endowments and pension funds, which carry greater clout than retail investors and demand low fees, typically invest in real estate through closely held private funds and not retail vehicles like the Blackstone REIT.

"In addition, heightened levels of redemption activity continue," Stanger noted, indicating that REITs likely face an uphill battle to boost capital over the rest of the year. "January 2023 redemptions total approximately $1.7 billion, or 1.6% of net asset value at the beginning of the period, for the NAV REITs that have reported at this time."

As last year came to a close, nontraded REITs came under intense scrutiny. A series of revamped REIT products, including the Blackstone REIT, that reserve greater amounts of cash to redeem investors than past REITs, were put to the test. Analysts and executives had noted last year that with interest rates rising and fears of a recession hanging over the commercial real estate market, investors would be eager to get out of REITs and redeem shares.

That anxiety has apparently spilled over into 2023. According to Stanger, four net asset value REITs, including Blackstone, have reported 2023 redemption requests exceeding monthly or quarterly limits. The other three were: Starwood Real Estate Income Trust Inc.; KKR Real Estate Select Trust Inc.; and RREEF Property Trust Inc.