New Entrants in Field of Nontraded REITs

This article is republished with permission from REITCafe.

According to The DI Wire, Cantor Fitzgerald is launching a $1 billion nontraded real estate investment trust (REIT) called Rodin Global Property Trust Inc. Rodin intends to focus investments to single-tenant, net-leased commercial properties located in the United States, the United Kingdom, and other European countries. The firm is offering three classes of common stock: class A, class T, and class I shares. The Blackstone Group also launched its first nontraded REIT, Blackstone Real Estate Income Trust, back in August. The Wall Street Journal reports that Blackstone is working to improve the traditional model and will roll out four classes of shares, each with a different fee structure. Both REITs have a minimum permitted investment requirement of $2,500.

Rodin Global Property Trust and Blackstone Real Estate Income Trust are entering the nonlisted REIT sector while it is experiencing substantial headwinds, facing criticism for high fees, vague disclosures, and low returns. The flow of capital to the sector has been scarce for the past several years. A fraud scandal involving Nicholas Schorsch of American Realty Capital in 2014 heightened public distrust in nontraded REITs, and thus the inflow of capital has diminished since then.

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In addition, new regulations have been enacted that reduce fundraising even further. In 2015 and 2016, regulations became effective that made the sale of high-commission products considerably more difficult to close. According to NREI Online, the industry’s fundraising peaked at $19.6 billion in 2013. Levels for 2014 and 2015 fundraising sharply declined to $15.6 billion and $10.0 billion, respectively. First-quarter 2016 sales from public program sponsors came in at $2 billion, down 55 percent from $4.4 billion in the first quarter of 2015.

The new Financial Industry Regulatory Authority rules (FINRA 15-02), effective as of April, now require sponsors to show the net purchase price immediately, along with any fees or commissions. The goal of these rules is to make the nontraded REIT sector more transparent and, subsequently, drive fees lower. As a result, the sector has come up with new share classes and reduced fee structures.

While nontraded REITs make up only a small percentage of the REIT universe, a large portion of the total transaction volume can be credited to their capital flow. As the industry’s efforts toward transparency create pressure to lower the now-disclosed fees, costs, and expenses, nonlisted REITs are starting to regain some favor among investors. With better-prepared players like Rodin Global Property Trust and Blackstone Real Estate Income Trust entering the market, the sector may be moving closer to the end of this fundraising drought.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.

** – 10 yr. Treasury Yield as of 10/21/2016.