Property market too volatile for scattered REITs

Financial Advisors


The non-trading real estate investment trust industry has spent years restructuring its product to be a friendlier mousetrap for investors by increasing the opportunity to extract cash from illiquid investments. . But the current market for commercial real estate is turning into rats, so much so that even Steve Jobs would challenge himself to design a trap that could trap this rodent.

Since 2017, brokers and financial advisors have sold a new generation of non-trading REITs worth tens of billions of dollars. Many are designed as net asset value REITs. In short, they are structured to generate long-term returns and offer greater transparency than in the past. product generation. Investors often buy products for stable returns instead of fixed income investments.

Rising interest rates and an under-capacity workforce in America’s urban offices are now major obstacles to commercial real estate investment, such as non-trading REITs. The lack of investor confidence associated with this year’s bank failures could limit funding in the short term, and that should hit commercial real estate investors as well.

In 2008, years before non-trading REITs with additional liquidity, such as Blackstone Real Estate Income Trust Inc., were launched, an older version of this product was hit by the commercial real estate recession. Due to outdated industry rules for pricing illiquid investments, investors believed non-trading REITs were worth $10 per share one day, with little explanation from REITs and I noticed that its value seemed to be drastically reduced by 10%, 20%, 30% or even more overnight. companies or their financial advisors;

And now the numbers are bad for commercial real estate investors.

Over the past year ended Monday, the Dow Jones U.S. Real Estate Index has fallen nearly 15.7%, while the S&P 500 Index has gained just over 1 percentage point over the same period. US office vacancy hit a record high of 12.9% in the first quarter, surpassing the 2008 financial crisis peak, according to a report from real estate data firm CoStar Group Inc. this month.

This is bad news for REITs of all kinds buying office buildings.

Of course, not all REITs invest in properties in the same sector. Investors who have avoided buying office buildings in big cities, like Blackstone REIT, may do better than others in the current recession.

But at least one critic of the new REIT isn’t convinced. Is this new mousetrap really better than the old one?

Unlike listed REITs, non-trading REITs are not traded on an exchange and have limited liquidity for investors, while Blackstone REIT and other new NAV REITs offer investors cash for their shares and liquidity. much better ability to increase Non-trading REITs aren’t priced daily like listed and trading REITs, so their true value remains murky despite the fact that they have a NAV, said the CEO of Armada ETF Advisors. One Phil Bak said:

“As far as Blackstone REIT and other NAV funds go, I don’t think they’ve done it yet, but they definitely will,” Bak said in an interview Monday. He said his company’s analysis of listed REITs and non-trading REITs shows the latter to be overvalued by as much as 30% of his.

“Listed REITs are priced in the market and have a viable price, so the value of a building that a REIT can sell is like that,” Bak said. “He who is not traded does not know the real value of NAV REIT. Remember, you do not know who owns the building.”

Bak is no indifferent observer in this repeated non-trading REIT war. Armada ETF Advisors has launched a new real estate exchange traded fund registered with the Securities and Exchange Commission.

$70 billion Blackstone REIT is the largest NAV REIT, telling investors in December that redemptions exceeded monthly limits of 2% of net asset value in October and 5% for the entire quarter Since then, it has faced intense scrutiny. This allowed the company to distribute investor demand on a pro-rata or limited basis. That means some investors who wanted to raise money from the fund were turned down, at least in the short term.

Investors continue to try to withdraw money from Blackstone REIT. The company reported last week that it again capped investor redemptions in April, according to a published report.

A Blackstone spokesperson said in an e-mail, “It’s all about strong performance, with BREIT achieving an annualized net profit of 12% since its inception over six years ago.” Yes, and it’s working as designed: about 96% of US investors and 93% of investors overall chose to remain in the fund in April.”

Meanwhile, investment bank Robert A. Stanger & Co. Inc. says revamped NAV REITs are performing solidly despite the recent commercial real estate turmoil. 1.8%, according to the investment bank.

The question is, will a liquidity-focused REIT mousetrap continue to work as certain sectors of commercial real estate face these extreme market conditions? Will modern REIT mechanisms yield to the price of investors and financial advisors who have marketed their products as safe and stable investments?

The longer an employee is away from an office building or cubicle, the more likely it is that the latter will occur.

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