"New Breed" of REITs Remains Flawed Despite Changes in Liquidity and Valuation

Clarion Partners Americas LLC and American Realty Capital have recently begun pitching a "new breed" of non-traded real estate investment trusts (REITs), which supposedly addresses the "old breed's" problems of illiquidity and untimely valuation of units. According to an Aug. 28 InvestmentNews article, the new non-traded REITs will be valued daily and will place a larger percentage of assets in liquid products like cash and bonds.

Despite these changes, however, a lot of the old problems still exist.

"New" non-traded REITs, like old REITs, aren't listed on exchange. The amount of units available for repurchase is still capped around 5 percent. And, the number of units available for redemption is still up to the trust's management. Additionally, the initial valuation of the product may be below what investors pay for it, depending on how much is taken out initially for fees.

"For example, if investors pay $10 per unit for a non-traded REIT and then, after commissions and various fees, see it listed immediately at $8.70, that would ‘leave a bad taste in investors' mouths,'" said Stacey Chitty, a partner with Blue Vault Partners LLC, according to the InvestmentNews article. (Blue Vault Partners LLC analyzes the non-traded-REIT market.)

For more information about the risks of non-traded REITS, read our posts on mortgage REITs, unlisted REITs, and Apple REIT 10.

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