That said, he doesn’t expect life cycle REITs to disappear because they give investors the opportunity to invest in the markets they anticipate will have the most upside over the next five-to-seven-year real estate cycle without having to think in perpetuity.
One Size Fits All
Unlike many private investments, NAV REITs aren’t restricted to accredited investors.
“A mom and pop retail investor, for $30,000 or $50,000, can get the same exposure to an institutional real estate manager as the major pension funds in this country,” says Gannon, who sees this as a game changer.
Also changing the industry dynamic, he says, is the entrance of major institutional asset managers into the NAV REIT market. Joining Blackstone are Nuveen, Griffin Capital, Starwood Capital, Oaktree and Clarion, to name a few.
The asset managers are using all their financial techniques (including leverage) and their acumen in acquiring real estate, he says. They have the financial muscle to renovate properties they purchase, and they know how to “scrub the pennies off,” he says, to get more net operating income out of them. In addition, he says, “These big, credible players are paving the way for others entering the market.”
Stanger projects non-traded NAV REITs will raise more than $15 billion in 2020, up from more than $11.8 billion in 2019. Gannon anticipates more traditional non-traded REITs will be converted into NAV REITs, despite the expense and challenge, because asset managers generally want to hold onto assets under management instead of liquidating them. The assets in a traditional non-traded REIT are often liquidated to give investors back their money at the end of the REIT’s life cycle.
To compare the yields on NAV REITs and traded REITs, Gannon suggests looking at the returns on NAV REIT “I” shares, which don’t have loads or commissions. “On a current basis, in the NAV REITs it’s usually something in the 5’s,” he says, “versus the traded REITs, which are probably in the 4’s or less.”
Sometimes the income is lower, however. The Vanguard Real Estate Index Fund ETF was yielding 3.35% in early February.
Jordan Heller, a managing director with Beacon Pointe Wealth Advisors and the partner in charge of the RIA firm’s New York tristate area operations, is using private REITs and niche private real estate funds for clients. These niches include senior housing, affordable housing and critical infrastructure investments.
“We appreciate the income stream as well as the more stable valuations relative to the public equity markets,” he says. “We do not mind locking up funds, provided we are getting compensated for the illiquidity.”