I am not sure what to make of this article in Registered Rep magazine. It is worth a read, at a minimum to see perspective from a financial advisor's point of view. I found some of the comparisons between non-traded REITs and traded REITs weak. One proponent of non-traded REITs says that non-traded REITs buying properties now don't have the legacy property issues that plague some traded REITs. True on the surface, but the counter point is that traded REITs, since they're continually priced, have already been discounted by the market for their legacy assets. Another weak point is this:
The illiquidity of public non-listed REITs actually drives what makes them popular with many investors — that they are valued based on appraisals of their underlying properties, and can't be sold on an exchange for instant liquidity, Goldberg says. Because their returns are not correlated to publicly traded securities, they can be attractive for diversifying an investor's portfolio.
“I think in large part that's what's fueled the interest,” Goldberg says. (Mark Goldberg is managing director at WP Carey & Co., a sponsor of non-traded REITs.)I didn't know illiquidity was so popular. I guess this popularity was why so many non-traded REITs stopped or restricted redemption requests during the credit crisis. The only reason there is no correlation between non-traded REITs and traded REITs is because non-traded REITs are priced at their offer price, which does not change until eighteen months after non-traded REITs end their capital raising. Over time, the underlying assets of traded REITs and non-traded REITs should correlate.
Another point is non-traded REITs' yields. Advisors and investors like the high yields offered by non-traded REITs. I would caution that not all yields are not equal. Many non-traded REITs have higher initial yields than the non-traded REIT can generate or support over time. These high initial yields are to attract capital, and are hopefully based on realistic assumptions for returns the REITs can generate. Non-traded REIT sponsors have to acquire assets that can support the non-traded REIT's yield. A non-traded REIT (or any REIT) that continually overpays its distribution will eventually have to drop its distribution. It's uncanny how the drop in yield seems to correspond with the end of a non-traded REIT's capital raising period.
One huge point not addressed in the article is compensation to financial advisors, which can be a gross commission of up to 7%. I wonder whether financial advisors would still be enamored with non-traded REITs if their commissions were a half or third of the current rate? I don't expect a rush sponsors trying to find out.