Non-Listed REITs
As of early 2013, the REIT marketplace was valued at $1.5 trillion: $900 billion in listed equity REITs, $300 billion in listed mortgage REITs, $200 billion in nonlisted equity, and 1% in nonlisted mortgage REITs. Nonlisted REIT growth from 2000 to 2013 was explosive, as shown in the table below.
Nonlisted REIT Growth
| 2013 | 2000 |
Equity Mkt. Cap. | $200 billion | $18 billion |
Assets Held | $90 billion | < $2 billion |
# of REITs | 80 | 5 |
Even though nonlisted REITs are SEC-registered and classified as “public” entities, they do not trade on major exchanges. Nonlisted REITs are sold as “blind pool” investments, meaning that capital is raised but specific properties for purchase are not identified during the offering period (unlike publicly-traded REITs). Costs and fees in nonlisted REITs average 15-18% of the initial investment (meaning 82-85 cents of each dollar raised is invested); this compares to 97-99 cents for listed REITs bought in the secondary marketplace. Listed below are nine other possible drawbacks of nonlisted REITs:
- Diversification—focus tends to be narrow—but this allows management to capitalize on their sector or geographical expertise.
- Blind Pool—Raising money may take several years; evaluation is difficult during this period (since properties have not been identified).
- Possible Dividend Risk—For the first few years, cash flow may not be sufficient to sustain shareholders’ dividends; cash reserves and investor capital may be needed. This is in contrast to listed REITs that have an FFO dividend payout ratio of 70%, which means there is an ample difference between cash flow and dividend payouts (source: NAREIT).
- Pressure to Buy Quickly—There can be significant pressure (e.g., the dividend) on the REIT advisor to buy properties for the blind pool as soon as possible, regardless of market conditions. From 2005-2008, nonlisted REITs raised $33 billion (45% of the total amount rose since year-end 1999); this period was the peak in commercial real estate valuations.
- Potential Conflicts of Interest—While most listed REITs are internally advised; most nonlisted REITs, at least initially, use an “outside” advisor that is affiliated with the REIT sponsor. These advisors are owned, controlled, and managed by the REIT’s principals and board members—which could result in substantial conflicts of interest.
- Lack of Transparency—Nonlisted REITs report less useful and less relevant data than their listed counterparts.
- Volatility—Although promoted as a positive, reduced share price volatility (compared to listed REITs) can be very misleading since nonlisted REITs are not subject to marked-to-market valuations. An economic downturn can result in a nonlisted REIT reducing its dividend or price per share without any advance notice.
- Limited Capital and Liquidity—Money is mostly raised during specific offering periods, meaning additional capital may not be available in the future when needed; assets may have to be sold at inopportune times. Investors have limited options if they need capital.
- Marketing Machines—Nonlisted REITs spend quite a bit of time and money on promotion and possible acquisitions. Critics point out that more time should be spent on property development and ongoing management.