Fifteen non-traded real estate investment trust funds hit the market last year, a record amount of new funds in this lesser-known corner of the real estate industry.
According to Blue Vault Partners, an Atlanta-based research firm that tracks non-traded REITs, investors poured $8.1 billion into the space last year. While that's not a record amount, it represented a 25% jump over 2009 levels, which was negatively impacted by the financial crisis. All told, there were 61 non-traded REITs with an estimated $71 billion in assets at year-end 2010.
Non-traded REITs are real estate investment trusts whose shares are sold directly, not via the stock market. Their prices are set by the REIT sponsor, and the industry standard is $10 per share. That price will remain constant during the life of the fund, which can last anywhere from five to ten years (or more). After that, investors hope to cash out through an initial public offering, by selling the fund to another portfolio or by selling off internal properties.
Non-traded REITs own--and in most cases, manage--income-producing real estate, and they distribute at least 90% of their taxable income to investors as dividends. Similar to publicly-traded REITs, non-traded REITs are registered with the Securities and Exchange Commission.
Blue Vault says last year's top three funds in investment sales were Cole Credit Property Trust III, followed by Apple REIT Nine and KBS Real Estate Investment Trust II. Cole's fund comprises roughly two-thirds retail properties and one-third office and industrial properties. The Apple fund is invested in hotel properties, and the KBS fund is invested mainly in office properties.
Regarding the 15 new non-traded REIT funds last year, which Blue Vault says topped the number of publicly-traded REIT initial public offerings, they raised just $51 million in capital versus $86 million in the 12 new funds launched in 2009.
"We crossed a line in 2010 in that we're getting too crowded and going too fast for the amount of money being raised," says Blue Vault managing partner Stacy Chitty. "I think it made people a little nervous as more people entered the space, and maybe got people thinking they better stick with the guys they know and who've been in the industry awhile."
But Chitty says the busy pace is a positive sign. "If our industry performs well, it's good to have more competition in the industry," he says. "We're happy that has occurred, and it looks like it will continue to occur in 2011."
Blue Vault estimates the non-traded REIT sector could attract $10 billion this year.
As for dividends, Blue Vault says the average yield paid by non-traded REITs was 6.5% at year-end last year. According to the National Association of Real Estate Investment Trusts, which follows the publicly-traded space, the FTSE NAREIT All REITs index cash dividend yield was 4.23% and the FTSE NAREIT Equity REITs index cash dividend yield was 3.54% during that period.