Written by The White Law Group• December 12, 2022• 3:48 pm• Blog, Securities Fraud

Non-traded REITs “Liquidity Issue”

Rising Interest Rates Causes Concerns for non-traded REIT Investors

According to Investment News on Friday, the liquidity issue of non-traded REITs may be becoming a problem for financial advisors at broker dealers and registered investment advisors who may not have had to deal with it before.

Interest rates continue to rise as a recession is looming and consequently, the commercial real estate market is taking a hit. As we reported recently, two of the largest non-traded REITs, Blackstone REIT (BREIT) and Starwood Real Estate Income Trust both had to limit redemptions after an influx of requests came flooding in from shareholders.

According to Investment News, until almost five years ago, the majority of non-traded REITs were sold by financial advisers at independent broker-dealers. Now, the big wire houses are having to deal with the “liquidity issue.”

Historically non-traded REITs have had some “serious problems” especially around 2008 during the economic credit crisis, when many non-traded REITs took a hit due to the sharp declines in commercial real estate, according to the article. There is a good chance that it will happen again as we see interest rates continue to rise.

The Risks of Non-Traded REITs – Liquidity Issue

Many financial advisors recommend non-traded REITs as a safe investment with steady returns, even describing them to be similar to bonds.

However, non-traded REITs are illiquid investments, and they aren’t listed on any exchange. If the investor wants to sell, they may be able to find a secondary market for non-traded REITS, but most likely will have to sell at a much-reduced price.

The other risks include the very real possibility of halting redemptions, unclear valuations, and high fees. There is also the risk that the company may not be able to generate enough revenue to cover monthly and quarterly distributions to investors.

According to the article, monthly fundraising has been declining throughout the year as interest rates continue to rise. The question in everyone’s mind is which non-traded REIT will be next to limit redemptions.

Non-traded REITs are rarely, if ever, suitable for short-term investors and even long-term investors must be willing to bear the risks of illiquidity. You should consider the front-end cost relative to the sales costs you would incur to buy and sell other securities during the same holding period as the life of the REIT. You may also want to consider how much share price appreciation and distributions you will need to receive to overcome these front-end charges

Beware promises of high yields and stability while glossing over the product’s lack of liquidity, fees and other risks. Ask your advisor to explain why they think the non-traded REIT is the right investment for you and how it will help you achieve your specific investment goals.

The White Law Group has represented numerous investors in claims against their brokerage firms involving unsuitable recommendations of non-traded REITs. If you have suffered losses investing in a non-traded REIT, please call The White Law Group at 1-888-637-5510 for a free consultation.

To learn more about investing in non-traded REITs please see: Did your Financial Advisor Recommend Investing in Non-Traded REITs?

The foregoing information, which is all publicly available, is being provided by The White Law Group. The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington. For information on the firm please visit www.whitesecuritieslaw.com.