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Non-Traded REITs Offer Stability and Portfolio Diversification

Market Data
Non-Traded REITs Offer Stability and Portfolio Diversification
by Michael Black

Investment portfolio diversification and risk management always have been key factors in reducing loss of asset value in the face of historically volatile markets. Of course, these strategies need not be limited to the traditional stock and bond markets. Several classes of direct investments also are available, and prominent among these are real estate investment trusts.

Usually when financial planners and industry analysts refer to REITs, they are talking about publicly traded REITs; however, another class of REITs exists that generally are called non-traded REITs.

Non-Traded REITs While non-traded REITs have relatively limited liquidity, they offer the same benefits as their publicly traded counterparts. By definition, the key benefit of non-traded REITs is that they are not yet publicly traded. Subsequently, they offer the reasonably predictable cash flow of publicly traded REITs without the volatility incumbent in the public markets.

Additionally, non-traded REITs receive the same tax benefits as publicly traded REITs. That is, by meeting certain requirements for taxable income distribution to shareholders, the REIT itself is not taxed, thereby reducing tax on the potential return on the investment, unlike traditional stock investing.

Life Before Listing In addition to their investment value and tax benefits, non-traded REITs also offer commercial real estate professionals another option for buying, selling, and managing real estate.

When a commercial real estate professional has several investors with common real estate investment objectives, a REIT offers the opportunity to achieve economies of scale and the benefits of diversification.

For example, one investor with a million dollars and some measure of leverage might be able to afford one commercial property. But 20 investors with a million dollars each may be able to acquire multiple properties — distributed among several geographic markets and many real estate sectors — at a lower cost per square foot.

Private vs. Public
The REIT structure is simply a method of allowing common ownership of multiple properties. The compelling difference between publicly traded and non-traded REITs is the balance between liquidity and market volatility.

Assuming the REIT remains non-traded, the investor incurs a lack of liquidity since the primary outlet for selling shares is the REIT company itself (although one could find another investor to buy one's shares). However, as noted, reduced exposure to market volatility is an offsetting benefit. The reverse is true of publicly traded REITs: Investors gain increased liquidity, but increased volatility exposure as well.

As mentioned above, a counterbalance to the lack of market liquidity, most non-traded REITs offer repurchase agreements if an investor wants out prior to public listing. Typically, the repurchase agreement will specify a discount to the investor's initial purchase price in consideration of acquisition and organizational costs. The specified discount rate oftentimes is scheduled to diminish over time as the appreciation in property value supersedes the start-up costs.

Of course, commercial property values are not static. But property value changes are glacial compared to price changes in public trading markets. Therefore, both publicly traded and non-traded REITs have relatively stable net asset values. However, publicly traded REIT share prices can fluctuate wildly based on the rate of return afforded by alternative investment opportunities, and they rarely reflect the true NAV.

For example, during the dot-com craze, investment dollars flooded the technology sector of the securities market, while publicly traded REITs traded at prices as much as a 40 percent discount to their actual NAV. As the mania faded from the technology revolution, publicly traded REIT prices have rebounded to levels in the 0 percent to 6 percent discount range. Even though the price/NAV still is slightly negative, this rebound has resulted in high returns for investors who bought and sold at the right time.

In concert with this resurgent demand driving up publicly traded REIT prices, the demand for new issues also is on the upswing. As the REIT market price/NAV approaches positive ground, the opportunity is ripe for non-traded REITs to consider listing their shares. Doing so gives investors increased liquidity via the public market — potentially at a premium to NAV — without enduring volatility along the way. Any appreciation in the underlying real estate before the REIT is listed should be reflected in the REIT's price once it begins trading.

Conversely, if the public markets retreat, resulting in a negative price/NAV environment, the non-traded REIT is not obligated to list. In other words, non-traded REITs offer investors reasonably predictable upside potential with less downside risk as compared to publicly traded REITs that face market fluctuations.

Also, as with publicly traded REITs, non-traded REITs face the issue of recession. But it is important to note that the listing status has less impact on a REIT's NAV than the particular real estate sector in which the REIT invests.

Given the liquidity of the public markets, investors in publicly traded REIT shares usually attempt to anticipate the future market. Therefore, if particular sectors benefit from a recession, such as discount retailers or grocery stores, the mere hint of a downturn can drive up the market value of publicly traded REIT shares, even though the NAV may not change.

However, the market value of recession-sensitive real estate sectors' REIT shares, including office properties and hotels, may drop in anticipation of a recession relative to NAV.

Non-traded REITs' lack of liquidity mitigates share price volatility. So, while both publicly traded and non-traded REITs reflect the effects of recession, REIT NAV generally will fluctuate less than market price.

For investors seeking ways to diversify traditional stock and bond portfolios, REITs offer an attractive alternative. But diversification is only part of a well-designed financial plan. Risk management, or reducing portfolio volatility, is just as important. Non-traded REITs can achieve both of these goals.


Get the facts before the opinion

It is extremely sad that so many people can only write about one side of an issue. The truth is that you will find good Non-traded REITs as well as bad Non-traded REITs. You will also find good and bad Publicly traded REITs. Also, good and bad stocks. Also, good and bad Mutual funds. Get the point.

You as an investor must be able to read the financial statements of the investment, get to know the management teams history, and determine if the investment fits your overall plan and risk tolerance. The brokers commission has nothing to do with the deal.

Education fixes bad decisions making. Get educated, don't just trust sales people, and please don't trust online nay sayers who can only tell you why you shouldn't do something, while at the same time can't explain why others are making money doing the same thing they told you not to do.

- If you are older or

- If you are older or retired, non-traded REITS may not be suitable investments for you because of your need for liquidity, and access to your money in case of medical costs. Many investors are not properly informed of the illiquid nature of these investments.

- A broker of financial advisor has a high duty to a customer to reccomend proper investments. Because non-traded REITs are not as heavily regulated, a broker may receive far greater commission for selling a REIT, even a poorly performing, problem-heavy, or risky non-traded REIT, because he receives more money for selling it to you.

- Non-Traded REITS also often have a number of financial or other structural problems that are not disclosed to the investor. The bad economy is may NOT be the cause for the problems, poor performance, and failure of non-traded REIT investments. Properly structured REIT investments should have factored into them the flexibility and mechanisms to deal with changing market cycles, but poorly devised investments do not.

- Often, investors are not informed of the risky nature, of these non-public, non-traded, unconventional, unregulated investment.

Many Non-Traded REIT (real estate investment trust) investments have problems. With some, an investor may be entitled to file a claim seeking to rescind the investment, and/or for monetary compensation. Many investors are not informed of the problems before being advised by a broker to invest. My law office handles claims for recovery for bad investments, including real estate securities.

If you have a problem with a non-traded REIT investment, please contact my law office via the link below.

Non-traded Liquidity

>If you are older or retired, non-traded REITS may not be suitable investments for you because of your need for liquidity,

Are you nuts?

These things are completely liquidity.

Wow, anyone who thinks an

Wow, anyone who thinks an untraded investment isn't as volatile as one that is traded and "liquid" I might add, is either ignorant, or lying for a commission. Just because you can see the price of a traded reit daily, doesn't mean it's more volatile than one with no market price, or liquidity for that matter!

thats not the point, the

thats not the point, the volatility of being traded on a market is due to the fact that the price can fluctuate with consumer sentiment, instead of the actual properties changing in value. The Non traded structure allows the value of the shares to be based solely on the value of the real estate, which can fluctuate, but is extremely less volatile than the traded structure which are affected by the values of the properties as well as overall macro environment and other market forces.


I agree with the first statement. This article is deceptive and its scary people push this kind of information.

What is the advantage of having a "less volatile" investment if you can't get your money out during volatile times? Answer: NO ADVANTAGE

"Non-traded structure allows the value of the shares to be based solely on the value of the real estate" - A VALUE YOU CAN NEVER GET OUT UNTIL IT GOES PUBLIC SO THIS POINT IS MUTE.

Volatility comparisons are only relevant to liquid investments.

Deceptive? How so?

The benefit of having a "less volatile" asset within a portfolio of Stocks, Bonds, Currencies, etc... is that it reduces over all portfolio volatility. Real Estate (traded and non traded) also offers low correlations to those other assets, providing further portfolio benefit. The presumption is to hold REITS during the volatile times......why would you sell? That's the advantage, as shown through the first 2/3rds of last decade, when the article was written, and worked well through the dot com crash. Mid decade, many REITS listed and investors got out at with nice gains, exactly as I wrote in the article.

As for liquidity, some REITS sold assets, some listed and some merged, providing liquidity when the public markets valued REITS at premiums to the real estate markets. Since the crash, WHERE ALL ASSET PRICES DECLINED, other than a short period of time that treasuries increased, another opportunity has risen for REIT investors, the secondary markets, where you can purchase non traded REITS at deep discounts to the traded and non traded values of real estate. This provides liquidity to an illiquid market in exchange for the discount.

As proven in the article, real estate, when held as real estate (versus a REIT stock) moves "glacially". The stock market has regained all of it's losses since the crash, real estate has not. But, those that are patient, it is coming back. The play is knowing when to buy non traded or traded and when to sell, and where. My article worked exquisitely, for me and my clients.

Please note the article on

Please note the article on non-traded REITs was published in 2002. Obviously the information may not apply in today's market.

CIRE magazine

Why? To say what you do, you

Why? To say what you do, you should substantiate it. Much like me saying you are the worst person that ever walked thiws earth, yet I don't know you.

These things are a rip off.

These things are a rip off. Go to

This is a shameful article.

This is a shameful article.

It is sad that this is the article that pops up #1 on Google if you search "non-traded REIT" (as of July 2011). Almost all non-traded REITs are a terrible investment. They have extremely high fees and, until recently, all of their "non-correlation" to traditional asset classes and "price stability" was due to their ability to hold the security price constant at what investors paid. This is no longer allowed and the prices of all non-traded REITs have been adjusted down to reflect this.

Any investor considering this "asset class" should avoid it. Any investor whose "adviser" is suggesting this investment needs to ask them why and, most importantly, how much they are being paid (commissions are often 9-10% and with other fees the total up-front take is 15%+). The reason that this is now a $70bn+ investment category is purely down to the exceptional commissions that are paid to brokers and "advisers" (and the one who wrote this article is particularly shameful as he is a Certified Financial Planner and markets himself as a wealth manager rather than the simple broker that he is).

Please read the following articles:

And the website below has a wealth of information on these investments. Buyer beware.

If you want real estate exposure, go elsewhere.

As of late April of 2011,

As of late April of 2011, traded REITs trade well over the NAV of the underlying real estate. For example,
Realty Income (O) is trading over 30% above NAV. Looks like today there is more value in non-traded REITS!

This may be the single worst

This may be the single worst analysis I've ever read. Truly pathetic.

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Michael Black, CFP, is an associated member of the Investment Advisors, a division of ProEquities, a registered investment adviser. Contact him at (602) 468-0015 or

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