I've been hearing a strange and unsettling theory regarding non-traded REITs that list their shares. The concept is that once a REIT is listed and traded on an exchange, it no longer satisfies the real estate alternative asset classification in a client's portfolio. A non-traded REIT, after a listing, somehow magically moves to the "stock" asset class, and investors therefore need to either buy another illiquid, non-traded REIT, preferably by selling the newly listed REIT, to preserve the real estate alternative investment portion of their asset allocation. This bizarre thinking is so full of boloney I am starting to burp as I write this post.
A non-traded REIT that lists its shares on an exchange becomes liquid, that much is true, but that is where the argument ends. When a REIT lists its shares it doesn't change the underlying real estate investment portfolio. If a non-traded REIT was a client's real estate allocation before it was listed, it is still a real estate investment after listing. The fact that a REIT was non-traded and is now a traded REIT has nothing to do with the asset class allocation decision. It's important to remember that whether a REIT is listed or not, the underling real estate investments still change in value over time. If you don't believe this just look at the most recent share values for KBS REIT I, some the Behringer Harvard REITs, or other non-traded REITs that have re-valued their assets.
The idea that an alternative investment has to be illiquid is as false as it is absurd. I don't know when the terms "alternative investment" and "illiquid" became synonymous. They are not. The first REIT was listed on the NYSE in 1965, so the idea of a liquid, listed REIT is not new. Many other alternative investments are liquid. Today, you can buy ETFs that track, slice, dice, short, double-short, long, double-long, gold, silver, oil, gas, and many other commodities. Managed futures, clearly an alternative asset class, are some of the most liquid investments in the world. Yes there are illiquid alternative investments, but whether an investment is liquid or illiquid is not the sole determinant of whether an investment is an alternative investment.
The negative implication that when a non-traded REIT becomes listed it is now a "stock" and is going to trade and perform like a "stock" is wrong. Stocks are not generic, even stocks in the same industry. Stocks ultimately trade and perform based on the underlying companies' fundamentals and future prospects. REITs, traded or non-traded, will perform based on the strength of their underlying business and assets.
There are, obviously, reasons to sell a non-traded REIT once it becomes liquid. A non-traded REIT listing on an exchange and becoming liquid, is not by itself a reason to sell. If a non-traded REIT was an appropriate investment initially, and still is after it lists on an exchange, any sales decision should be made for reasons other than because it's now liquid. Non-traded REITs that list their shares own real estate and will continue to own real estate and fulfill any real estate asset class requirement.
1 comment:
I tend to agree. However, there is another side of the story. Since the3 mid 90s, equity REITs have maintained a fairly high correlation with common stocks, especially small cap stocks. The correlation has been on the order of 0.60 to 0.70. It has not been determined which way the causation runs (whether it is correlated with stocks because it is liquid or it is correlated because it is equity). Autocorrelation studies against stocks and bonds have shown anywhere from 20% to 30% unique risk factors among traded REITs. This suggests that traded REITs offer an element of diversification to a stock and bond portfolio, perhaps not the same kind of diversification as an apartment building.
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