Blackstone Group started selling its first nontraded REIT several months ago, and the product had raised over $886 million as of May 31, according to Robert A. Stanger & Co. Broker-dealers selling the product include UBS, Morgan Stanley and Bank of America Merrill Lynch.
“Blackstone is coming into the market because it recognizes that self-directed retirement plans are growing rapidly,” said Keith Allaire, managing director of Robert A. Stanger, a real estate investment banking firm, in an interview.
“Retirement savings that used to be done via corporate pension plans have devolved into individuals saving for their own retirement,” Allaire explained. And this means “individuals will work through financial advisors to construct their own diversified portfolios — portfolios which should include a real estate allocation. Institutional real estate managers are increasingly recognizing this trend and realize that the individual market will become a major source of equity.”
And there will be more new players coming into the market as a result, the real estate specialist says, despite the Labor Department’s new fiduciary rule and its impact.
“The long-term perspective is that institutional real estate managers see money migrating from corporate pension plans to the retail investor marketplace,” he said.
“There is a temptation to conclude that W. P. Carey’s exit from offering new nontraded REIT products bodes poorly for the long-term prospects for nontraded real estate investment vehicles. But I believe W.P. Carey’s motivations had more to do with a desire to become a pure net lease REIT instead of a hybrid net lease–asset manager REIT,” Allaire explained.
“The simple fact is that individual investors should have a portion of their portfolios invested in nontraded real estate,” he added, “and that reality will ultimately drive the market to provide these investment products.”
In 2016, REIT fundraising — or sales — totaled about $4.5 billion, according to Stanger, which is down more than 50% from some $10 billion in 2015.
The first five months of 2017, though, saw fundraising of $4.5 billion as Blackstone rolled out its nontraded REIT, which has seen “dramatic success,” Allaire says.
A mixture of upfront commissions and rolling fees has attracted the attention of regulators, attorneys and investors.
“The entire fee structure in the industry has been coming down and continues to evolve,” the Robert A. Stanger executive said. “While the regulatory limit for total distribution costs is 10% of gross offering proceeds, the market level has declined to about 8.5% today and, in some cases, is substantially lower than that.”
Allaire points out that multi-share class structures are now available in nontraded REITs, providing investors with more flexibility in terms of choosing how their advisor gets compensated.
“Besides a share class which pays all sales commissions up front, nontraded REIT investors can also select share classes with upfront sales commissions as low at 2.5% to 3% with a trailing shareholder servicing fee paid to the advisor, or share classes with no upfront sales commissions when held in wrap accounts,” he said.