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Non-traded REITs “Liquidity Issue”

Non-traded REITs "Liquidity Issue", featured by top securities fraud attorneys, the White Law Group

High Interest Rates Causes Concerns for Non-traded REIT Investors 

According to Investment News, 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 are high as a recession is looming and consequently, the commercial real estate market is taking a hit. As we reported last year, 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, most 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.

Non-Traded REITs Overvalued?

In a report last May, Investment News raised concerns about potential overvaluation in non-traded REITs, especially those specializing in commercial real estate, suggesting an overvaluation of up to 30%. The ongoing trend of remote work in many American businesses post-pandemic, alongside rising interest rates, has adversely affected commercial real estate.

According to Investment News, the Dow Jones U.S. Real Estate Index witnessed a significant decline of 15.7% over the past year, contrasting with a marginal increase of just over one percentage point in the S&P 500 index during the same period.

Furthermore, a recent report from real estate data firm CoStar Group Inc. highlighted a record-high U.S. office vacancy rate, reaching 12.9% in the first quarter, surpassing levels observed during the 2008 financial crisis.

These developments raise concerns for investors in non-traded REITs due to their limited share redemption programs, which exacerbate the inherent “liquidity issue” associated with such products.

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 like 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.

Non-Traded REIT Investigation 

The White Law Group has represented numerous investors in the following non-traded REITs, among others.

Broker Due Diligence

According to FINRA these products are an ongoing concern for the regulator and firms must ensure they are suitable for an investor’s risk profile and investment strategy. Many of these non-traded REITs were promised to provide steady growth, and invulnerability from volatile markets, which is not the case.

Brokerage firms are required to perform adequate due diligence on any investment they recommend and to ensure that all recommendations are suitable for the investor considering that investor’s age, investment experience, net worth, risk tolerance, investment objectives, and income. Firms that fail to perform adequate due diligence or that make unsuitable recommendations can be held responsible for investment losses in a FINRA arbitration claim. 

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.

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 whitesecuritieslaw.com.


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