Scrutiny from regulators because of falling share valuations is forcing the $84 billion nontraded real estate investment
trust industry to clean up its act.
And that will pay off for investors, according to
BMO Capital Markets managing director Paul Adornato, an analyst who covers the industry on behalf of listed REITs.
“There’s no question that the [nontraded
REIT] industry has a lot of problems and is not necessarily totally aligned with investors, which are primarily retail investors,” Mr. Adornato said Wednesday while leading a panel at the annual conference of the National Association of Real Estate Investment Trusts in New York.
“Having said that, all of the press and attention on the nonlisted
REIT space has helped to improve the shareholder friendliness of that group,” said Mr. Adornato. “It’s not perfect by any means, but it seems to be moving in the right direction. For example, there’s more attention paid to fees that the individual shareholders are shouldering. By no means is the industry fixed. There’s a very long way to go.”
Most nontraded REITs are bought at $10 per share, so when some of them came out over the winter with estimated valuations showing a 30% to 50% decrease in value from their original share price, some investors and advisers were shocked.
“There are a lot of issues that [nontraded REITs] need to overcome,” Mr. Adornato said. “We don’t endorse the industry. We’re just keeping an eye on it because those assets may find their way into the publicly traded realm.”
A couple of the biggest problems facing the industry include internalization fees that advisers to some REITs charge, adding to shareholders’ costs, Mr. Adornato said.
Some of those fees don’t make sense, he said. “A couple of groups are starting to rethink that. They would still like to remain in the business of being an adviser to these funds but they recognize that the fee structure may not be in keeping with what’s palatable these days.
The perception of nontraded REITs by their listed and traded counterparts “is still negative, and rightly so,” Mr. Adornato said, noting, however, that traded REITs want to acquire portfolios of nontraded
REIT assets. “Of course, everything has to transact at the right price. [Nontraded REITs] is just another potential group of assets.”
