The ebb and flow of economic fundamentals, the credit markets, and the equity and fixed income markets have created an opportunity for investors to generate strong, risk-adjusted returns in the commercial real estate market today. At South Coast, we would suggest this is an excellent time for investors to educate themselves on the pros and cons of commercial real estate investments – especially those that are intentionally illiquid and long-term in nature.
A balanced investing approach requires investors spread their capital across a variety of sectors and strategies in order to diversify the risk characteristics as well as the duration of their individual holdings. In today’s investing environment, an investor must first and foremost satisfy their need for liquidity. Having adequate portfolio liquidity is essential, however it may come at a cost – marginal to negligible yields, potential for moderate to extreme volatility, ect. Once liquidity needs are satisfied, investors would be wise to look out the duration curve and explore opportunities that are longer-term and intentionally illiquid (for a period of time).
One such alternative that is actively used in the South Coast Planning Process is a Non-Traded Real Estate Investment Trust (REIT). Non-traded REITs are a disciplined investment designed to be held for seven to 10 years, offering investors a potentially tremendous benefit of illiquidity, which may safeguard them from making poorly-timed market decisions. Non-Traded REITs have a unique lifecycle which potentially allows investors to not only receive returns, but a hedge against inflation.
In the early stages of a non-traded REIT, a sponsor company raises funds from both private and institutional investors while purchasing real estate assets during an offering period. After closing the Non-Traded REIT to additional investors, the sponsor will continue to use the raised capital to finance the purchase of commercial real estate, such as multi-tenant apartment buildings, retail properties, office buildings or industrial facilities. During the majority of the product’s lifecycle, investors generally receive dividends until the final stage; the liquidation event.
Since these products are long-term investments, a Non-traded REIT takes an average of about nine years to mature to a point at which it can execute an exit strategy (though the actual holding period for a given program may differ according to the business strategy employed). The sponsor company can liquidate the Non-traded REIT’s assets in a number of ways, including listing on a stock exchange, extending its non-public status or actually selling the properties to return investors’ capital.
Twenty-three offerings have gone full-cycle to date. Full-cycle simply means that the offering created liquidity for their investors through a number of potential means. Most recently, American Realty Capital Trust (ARCT) and W. P. Carey announced transactions that would provide investors in their NL REITs with liquidity via the public stock market.
On March 1, 2012, less than seven months after closing its public non-traded real estate offering, ARCT (NASDAQ:ARCT) internalized its management team and listed its shares of common stock on the Nasdaq Global Select Market. The approximately 178 million shares listed were originally sold at a $10.00 per share purchase price (for retail investors) during the company’s public non-listed offering which ended in July, 2011. The stock closed at $10.49 on its listing day, with approximately 4.5 million shares traded. Since then the shares have traded over $11 per share and over 75 million total shares have traded hands.
Keep in mind that when making an investment into any illiquid investment vehicle, that if you need to liquidate there may not be a secondary market and if there is there may be a significant discount taken by selling early. There are specific risks associated with each strategy that should be fully explored before determining if an investment is suitable and appropriate for an individual investor.
These are but two examples of a Non-Traded REIT providing potentially significant returns to investors after going full-cycle. As the real estate market continues to recover, the potential for greater returns and dividends may increase.
In a distinctly different approach to product design, Non-Traded REITs are purposely built to be held. This structure makes them powerful and effective for investors who do not need immediate liquidity and want to balance their portfolio with a long-term investment. During the majority of its lifespan, the Non-Traded REIT tends to have a low correlation to the stock market, which can help diversify a portfolio of short-term, liquid investments.
Now is the time to consider direct investments like these for your portfolio as they are primed to not only survive, but have the potential to continue to perform well in today’s market conditions.