MarketWatch’s Chuck Jaffe describes nontraded REITs as the “Stupid Investment of the Week.” He came to that conclusion after a big industry meeting promoting alternative investments, including nontraded real estate investment trusts, to financial advisors and money managers. The main disadvantage of nontraded REITs, according to Jaffee, is illiquidity, which flows from the absence of a ready market and restrictions on when and how they can be sold.
The perceived attraction of nontraded REITs ? its static share price ? is actually a major problem, says Jaffee. Too many investors believe that the unchanging share price reported on their account statements means that the REIT has a stable share price. The static share price is arbitrary, a fiction, Jaffee says, as investors in Apple REITs sold by David Lerner Associates have discovered. Lerner was sued by the Financial Industry Regulatory Authority (FINRA) and faces numerous arbitrations for misleading investors that the $10 per share purchase price was an appropriate valuation of the REITs when the value of the underlying real estate had deteriorated.
The nontraded REIT business has grown from $28 billion to $80 billion in the last five years. “[N]o one wakes up in the morning and says ‘All I need is a non-traded public REIT to flesh out my portfolio,'” says Jaffee. Nontraded REITs are sold, not bought. They are marketed aggressively because of high commissions – often 15% or more.
Investors who are interested in adding real estate to their portfolios should buy publicly listed (i.e., traded) REITs, according to Jaffee, who adds: “It’s also worth noting a recent study from Cohen & Steers Inc. (NYSE:CNS) ? a New York based REIT specialist ? which showed that listed REITs have consistently outperformed non-traded and private issues by at least several percentage points per year, over various time frames spanning the last three decades. Thus, the perceived performance edge from investors staying put because they are not influenced by daily price fluctuations has not paid off in actual returns.”
Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. The firm is currently representing clients in alternative investment cases including those involving nontraded REITs While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.