Commercial REITs for Small Investors See Increasing Demand
October 20 2020 - 8:29AM
Dow Jones News
By Peter Grant
A new type of commercial real-estate fund that targets small
investors is raking in money again after demand cooled during the
early months of the coronavirus pandemic.
The open-ended funds, known as nontraded real-estate investment
trusts, are run by big firms like Blackstone Group Inc. and
Starwood Capital Group that typically deal with institutional
investors. The new products typically take investments of as little
as $2,500 and have been paying dividends above 5% without the
volatility of the stock market.
Demand is starting to recover for these funds. In the third
quarter, the funds raised $1.37 billion, according to Robert A.
Stanger & Co., a financial firm that tracks the market. That
was $450 million more than they raised in the previous quarter,
when a record number of investors tried to get their money back and
some weren't able to redeem shares.
"Once everybody took the deep breath and said the world is not
over, they started raising more and the redemptions declined," said
Kevin Gannon, Stanger's chief executive.
The new fundraising still is low compared with the record $4.98
billion raised in the first quarter of 2020, mostly before the
pandemic hit. But the bigger nontraded REITs have largely held
steady in value, while shares of some publicly traded REITs in the
office, retail and lodging industry have fallen more than 30%.
"Fundraising has rebounded because investors are no longer in a
'panic' mode' and are looking for...attractive yields in a
yield-starved world," said John McCarthy, chief executive of
Starwood Real Estate Investment Trust.
Now, some investors also feel these funds may be positioned to
take advantage of steep discounts which are expected in the
commercial real-estate market, according to industry
participants.
Many funds have plenty of cash on hand. "We have a robust
pipeline," said Mr. McCarthy.
Nontraded REITs have been around for more than 20 years. But the
new funds are structured differently from the closed-end nontraded
REIT structures that fell out of favor with financial advisers
about five years ago. The new version has lower fees and better
disclosure.
Michael Godwin, chief investment officer of Fragasso Financial
Advisors Inc., said his Pittsburgh-based investment-management firm
is advising clients to boost their nontraded REIT portfolios as a
portion of their fixed-income holdings. These real-estate funds
yield more than 5% and compare favorably with many investment-grade
fixed-income investments yielding less than 1.5%, Mr. Godwin
noted.
Many of the newer funds are invested in property types that have
fared best in 2020. For example, about 30% of their investments
have been in industrial space, which has outperformed because of
the growing use of e-commerce, according to Stanger. About 33% have
been in rental apartments.
Meanwhile, only 15% of their investments have been in
hospitality, which the pandemic has clobbered by shutting down much
of the travel industry. About 14% has been invested in office and
7% in retail, which also have been hard hit.
Blackstone's nontraded REIT, which was one of the pioneers of
the new structure, made most of its investments in apartments and
industrial space. That fund also made headlines by making big
investments in Las Vegas, which saw business evaporate in the early
months of the pandemic.
But the fund is insulated because it purchased stakes in
ventures that own the real estate of the Bellagio, the MGM Grand
and the Mandalay Bay. Those ventures collect rent from the
operator, MGM Resorts International, making them more secure.
Tourists have started returning to Las Vegas, though the convention
business remains moribund.
Blackstone's nontraded REIT was valued at $11.17 a share as of
the end of September, compared with $11.45 at the end of 2019,
according to public filings. Starwood's fund was valued at $21.33 a
share at the end of September, compared with $21.57 at the end of
last year.
Some nontraded REITs are continuing to do deals, even though the
commercial real-estate sales market has been anemic. Blackstone
last week purchased a long-term lease of Roku Inc.'s headquarters
in San Jose, Calif., for $275 million.
Blackstone has about $3 billion in cash available for new deals
or to meet redemption requests. The fund "is very well positioned,"
said Frank Cohen, its chairman and chief executive.
Write to Peter Grant at peter.grant@wsj.com
(END) Dow Jones Newswires
October 20, 2020 08:14 ET (12:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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