Nontraded REITs’ Dividends Come With Confusion, Controversy

Interest rates have been low for quite some time, and investors are searching for ways to generate higher yields. An increasing number of them have turned to non-exchange-traded real estate investment trusts (nontraded REITs). However, nontraded REITs offer high levels of confusion and controversy along with their high yields, and regulators are concerned that these products may not be appropriate for many of the people who invest in them.

The difference between nontraded and exchange-traded REITs

REITs pool money from many investors to buy a portfolio of income-producing properties, including office buildings, apartments, shopping malls and more. Exchange-traded REITs sell their shares on stock exchanges such as the NYSE. Shares of nontraded REITs are purchased from broker-dealers and are not available on exchanges.

The perils of nontraded REITs

Nontraded REITs are becoming increasingly popular because they generally offer much higher dividend yields than publicly traded REITs. However, nontraded REITs come with a laundry list of potential negatives — they are difficult for investors to sell, their performance and market value are hard to understand because they don’t trade, and the fees can be high. According to the Financial Industry Regulatory Authority (FINRA):1

  • Nontraded REITs can be illiquid for periods of eight years or more.
  • Early redemption of shares is often very limited.
  • In some cases, periodic distributions may be heavily subsidized by borrowed funds and may include a return of investor principal. (In contrast, dividends that investors receive from large exchange-traded corporations typically come from earnings only.)
  • Front-end fees can be as much as 15% of the initial offering share price

The view of the Invesco Real Estate Global Securities team

Our domestic REIT strategy focuses on identifying higher-quality exchange-traded REITs that are trading at attractive relative values. We seek total return, which incorporates growth of capital as well as yield — a yield that is sourced from a company’s earnings and that we believe is sustainable and/or growing.

Over the 25-year history of the non-traded REIT industry, 34 non-traded REITs have logged “round-trip” track records, according to Green Street Advisors. In other words, they’ve gone from initial formation all the way through to a “liquidity event,” such as going public, arranging a merger or selling their assets. When Green Street examined these track records, they found that the returns generated by the average non-traded REIT lagged those of their publicly traded counterparts in the same property sector over the same time span by 3.6 percentage points a year.2

And, of course, we want the option to exit an investment whenever we feel the time is right, which requires the liquidity that’s provided by national exchanges.

Talk to your advisor

There are many different types of investors, and many different types of investments that you can use to pursue your goals. If you believe REITs can help you generate the yield and returns you seek for your portfolio, talk to your financial advisor to make sure you have a good understanding of the type of REITs that are available and the risks and opportunities associated with each.

1 Source: FINRA, Investor Alerts, “Public Non-Traded REITs—Perform a Careful Review Before Investing”

2 Source: Source: Green Street Advisors, Aug. 27, 2014

Important Information

REIT/real estate risk is the risk that investments in real estate related instruments may be affected by economic, legal, cultural, environmental or technological factors that affect property values, rents or occupancies of real estate related to the Fund’s holdings. Real estate companies, including REITs or similar structures, tend to be small- and mid-cap companies, and their shares may be more volatile and less liquid.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.





All data provided by Invesco unless otherwise noted.

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