Publicly Traded vs. Non-Traded REITs for Accessibility and Liquidity: 7 Key Differences

The real estate landscape presents a rich variety of investment options, notably REITs. Both publicly traded and non-traded REITs offer unique advantages and challenges, particularly when it comes to accessibility and liquidity.

In this article, we delve into the seven key differences between publicly traded and non-traded REITs, focusing especially on the aspects of accessibility and liquidity.

Understanding the basics of publicly traded REITs

Publicly traded REITs, or Real Estate Investment Trusts, are companies that own and manage income-producing real estate assets. These assets can include properties such as office buildings, shopping centers, apartments, and hotels. One key feature of publicly traded REITs is that they are traded on major stock exchanges, allowing investors to buy and sell shares of the REIT like any other stock.

By investing in publicly traded REITs, individuals can gain exposure to the real estate market and potentially earn income through dividends paid by the REIT. Publicly traded REITs are required to distribute a significant portion of their taxable income to shareholders, which can be appealing for investors seeking regular income.

Key features of non-traded REITs

  • Limited liquidity: Unlike publicly traded REITs, non-traded REITs do not trade on a public stock exchange. This limited liquidity means that it can be more challenging for investors to buy or sell shares of a non-traded REIT.
  • Longer holding periods: Non-traded REITs typically have longer holding periods compared to publicly traded REITs. Investors may need to hold their shares for several years before they have the opportunity to redeem or sell them.
  • Lower transparency: Non-traded REITs may have lower levels of transparency compared to publicly traded REITs. Information about the non-traded REIT’s performance, portfolio, and financials may be less readily available to investors.
  • Higher fees and expenses: Non-traded REITs often come with higher fees and expenses, such as sales commissions, management fees, and administrative costs. These fees can impact the overall returns for investors.
  • Distribution variability: The distributions paid by non-traded REITs may vary over time and are not guaranteed. Investors should be aware that income generated by the REIT may fluctuate and may not be consistent.
  • Valuation challenges: Determining the value of shares in a non-traded REIT can be challenging due to the lack of a market price. This can make it difficult for investors to assess the true worth of their investment until a liquidity event occurs.
  • Regulatory oversight: Non-traded REITs are subject to regulatory oversight, but the level of oversight can vary. Investors should understand the regulatory framework governing the specific non-traded REIT they are considering investing in.

7 key differences between publicly traded and non-traded REITs in terms of accessibility and liquidity

1. Limited availability of non-traded REITs

Non-traded REITs are generally not as readily available to individual investors compared to publicly traded REITs. They are typically offered through private placements and may have specific criteria for eligibility, such as minimum investment amounts or accreditation requirements. To access non-traded REITs, investors may need to work with a financial advisor or broker-dealer who has access to these offerings.

If you are interested in investing in non-traded REITs, consider consulting with a financial professional who specializes in real estate investments. They can guide you through the process and help you identify suitable opportunities.

2. Limited liquidity of non-traded REITs

Unlike publicly traded REITs that can be bought and sold on stock exchanges throughout the trading day, non-traded REITs have limited liquidity. Typically, there is no established market for non-traded REIT shares, making it more challenging to sell or redeem them. Investors should be prepared to hold their investment for an extended period, often several years, until a liquidity event occurs.

Before investing in a non-traded REIT, carefully consider your investment horizon and liquidity needs. Make sure you are comfortable with potentially having limited access to your investment for an extended period.

3. Potential lock-up periods for non-traded REITs

Non-traded REITs may have lock-up periods during which investors are unable to redeem or sell their shares. These lock-up periods can range from a few years to a decade or more, depending on the specific non-traded REIT. Investors should carefully review the offering documents and understand the terms and conditions regarding lock-up periods before making an investment.

When considering a non-traded REIT, thoroughly review the prospectus or offering memorandum to understand the lock-up period and any potential restrictions on redeeming or selling your shares.

4. Valuation challenges for non-traded REITs

Determining the value of shares in a non-traded REIT can be complex due to the absence of a readily available market price. Unlike publicly traded REITs, which have market-driven pricing, non-traded REITs rely on periodic valuations conducted by independent third-party appraisers. These valuations may not reflect the true market value of the underlying assets held by the REIT.

Recognize that the lack of a market price for non-traded REIT shares introduces uncertainty when it comes to valuing your investment. Consider diversifying your portfolio with other types of investments that have more transparent pricing mechanisms.

5. Potentiallyly higher fees and expenses for non-traded REITs

Investing in non-traded REITs often involves higher fees and expenses compared to publicly traded REITs. These fees can include upfront sales commissions, ongoing management fees, acquisition fees, and administrative costs. It’s essential for investors to carefully review the fee structure and understand how these costs can impact their overall returns.

When evaluating non-traded REITs, pay close attention to the fee structure and compare it to other investment options. Consider the impact of these fees on your potential returns and factor them into your investment decision-making process.

6. Lower transparency with non-traded REITs

Compared to publicly traded REITs, non-traded REITs generally offer lower levels of transparency. Information about the non-traded REIT’s performance, portfolio composition, financial statements, and ongoing operations may not be as readily available to investors. This limited transparency can make it challenging to assess the REIT’s current financial health and make informed investment decisions.

Before investing in a non-traded REIT, thoroughly review the disclosure documents provided by the issuer. Evaluate the information available and consider seeking independent research or advice to gain a better understanding of the REIT’s operations and financial position.

7. Regulatory oversight of non-traded REITs

Non-traded REITs are subject to regulatory oversight, but the level of oversight can vary depending on factors such as the type of offering and jurisdiction. Regulatory bodies like the Securities and Exchange Commission (SEC) play a role in overseeing certain aspects of non-traded REITs, including compliance with securities laws and regulations.

Before investing in a non-traded REIT, research the regulatory framework governing these investments in your jurisdiction. Consider consulting with a legal or financial professional who can provide guidance on understanding the regulatory landscape for non-traded REITs.

Delving into the accessibility of publicly traded REITs

These REITs are listed and traded on major stock exchanges, making it easy for investors to buy and sell shares at market prices throughout the trading day. Investors can access publicly traded REITs through their brokerage accounts, online trading platforms, or financial advisors.

The availability of real-time pricing information, public filings, and research reports also enhances the accessibility and transparency of publicly traded REITs. This accessibility allows investors to enter and exit positions quickly, providing flexibility and liquidity in their investment portfolios.

However, it’s important for investors to conduct thorough research and due diligence to make informed investment decisions when investing in publicly traded REITs.

Accessibility issues with non-traded REITs

  • Limited availability: Non-traded REITs may not be as widely available to individual investors compared to publicly traded REITs.
  • Restricted access: Investors may need to meet specific eligibility criteria, such as minimum investment requirements or accreditation status, to access non-traded REITs.
  • Limited distribution channels: Non-traded REITs are typically offered through private placements, which may limit the number of distribution channels available for investors to access these investments.
  • Lack of secondary market: Unlike publicly traded REITs that can be bought and sold on stock exchanges, non-traded REITs generally lack a secondary market, making it more difficult for investors to sell or redeem their shares.
  • Longer holding periods: Investors in non-traded REITs often face longer holding periods before they can exit their investment or potentially receive liquidity through a liquidity event.
  • Complex investment structure: Non-traded REITs can have complex investment structures, which may be less familiar to individual investors and require a deeper understanding of the offering’s terms and conditions.
  • Higher initial investment: Non-traded REITs often require higher minimum investment amounts compared to publicly traded REITs, potentially limiting accessibility for smaller investors.

Why liquidity matters: A look at publicly traded REITs

The ability to easily buy and sell shares on major stock exchanges throughout the trading day provides investors with flexibility and control over their investments. Liquidity allows investors to quickly enter or exit positions, take advantage of market opportunities, and manage their portfolios according to their changing investment goals or financial needs.

The presence of a liquid market ensures that prices are determined by supply and demand dynamics, providing transparency and fair valuations for investors. This liquidity also allows investors to easily diversify their holdings, allocate capital efficiently, and adjust their exposure to the real estate sector as market conditions change.

Assessing the liquidity of non-traded REITs

Assessing the liquidity of non-traded REITs can be challenging due to their limited liquidity compared to publicly traded REITs. Non-traded REITs typically do not have an established market where investors can easily buy or sell shares. Instead, investors often face longer holding periods and may have limited opportunities to redeem or sell their shares, depending on the specific terms and conditions of the investment.

This lack of liquidity can restrict investors’ ability to access their capital when needed and may limit their flexibility to adjust their portfolio allocations. It’s important for investors to carefully consider their investment horizon, liquidity needs, and the potential impact of limited liquidity before investing in non-traded REITs.

Seeking professional advice and thoroughly reviewing the offering documents can provide valuable insights into the liquidity provisions and potential exit strategies associated with a particular non-traded REIT investment.

The risks and rewards of investing in both types of REITs

Risks of investing in publicly traded REITs

  • Market volatility: Publicly traded REITs can be subject to market fluctuations, which can impact the value of their shares.
  • Interest rate sensitivity: Changes in interest rates can affect the borrowing costs and valuation of real estate assets held by publicly traded REITs.
  • Liquidity risk: While publicly traded REITs offer liquidity, there is still a risk of price volatility and potential difficulty in selling shares during market downturns.
  • Regulatory and legal risks: Publicly traded REITs are subject to regulatory oversight and may face legal challenges or changes in tax laws that can impact their operations and financial performance.

Rewards of investing in publicly traded REITs

  • Potential for capital appreciation: Publicly traded REITs offer the opportunity for investors to benefit from capital gains as the value of their shares increases over time.
  • Diversification: Investing in publicly traded REITs can provide diversification benefits by gaining exposure to different types of real estate assets across various geographic regions.
  • Income generation: Many publicly traded REITs distribute a significant portion of their income as dividends, offering investors the potential for regular income payments.

Risks of investing in non-traded REITs

  • Limited liquidity: Non-traded REITs have restricted liquidity, making it challenging for investors to sell or redeem their shares before a liquidity event occurs.
  • Valuation uncertainty: Determining the true value of non-traded REIT shares can be difficult due to the absence of a market price, potentially impacting investors’ ability to assess their investment’s worth accurately.
  • Higher fees and expenses: Non-traded REITs often come with higher fees and expenses, including sales commissions and ongoing management fees, which can reduce overall returns.

Rewards of investing in non-traded REITs

  • Potential for income generation: Non-traded REITs typically distribute a significant portion of their taxable income as dividends, providing potential regular income to investors.
  • Diversification within real estate: Investing in non-traded REITs can offer exposure to different types of real estate assets, allowing for portfolio diversification.
  • Potential for capital appreciation: As non-traded REITs grow and execute their investment strategies, there is the potential for the underlying real estate assets to appreciate in value.

Making the right choice: Factors to consider

  1. Investment Goals: Consider your investment goals, whether they focus on capital appreciation, regular income, diversification, or a combination of these factors. This will help determine which type of REIT aligns better with your objectives.
  2. Risk Tolerance: Assess your risk tolerance and understand the risks associated with each type of REIT. Publicly traded REITs may be subject to market volatility, while non-traded REITs have limited liquidity and potential valuation uncertainties.
  3. Liquidity Needs: Evaluate your liquidity needs and financial circumstances. If you require more immediate access to your investment or have short-term liquidity needs, publicly traded REITs may be more suitable due to their ability to be easily bought and sold on stock exchanges.
  4. Investment Horizon: Consider your investment horizon and how long you are willing to hold your investment. Publicly traded REITs offer the flexibility to adjust your holdings quickly, while non-traded REITs often involve longer holding periods.
  5. Transparency and Information: Assess your preference for transparency and access to information. Publicly traded REITs generally provide more transparency due to regulatory requirements and readily available market information, while non-traded REITs may offer less transparency with limited reporting requirements.
  6. Financial Advisor Guidance: Seek advice from a qualified financial advisor who can provide personalized recommendations based on your individual circumstances, risk tolerance, and investment goals. They can help assess the appropriate balance between publicly traded and non-traded REITs in your investment portfolio.
  7. Fees and Expenses: Consider the fees and expenses associated with each type of REIT. Non-traded REITs often have higher upfront fees and ongoing management expenses, which can impact overall returns compared to publicly traded REITs.

Real-world scenarios: Comparing REITs in practice

In real-world scenarios, comparing REITs in practice involves considering various factors. For example, suppose an investor seeks regular income and liquidity. In this case, publicly traded REITs may be more suitable due to their ability to provide dividend income while allowing for easy buying and selling of shares on stock exchanges.

On the other hand, if an investor has a longer investment horizon and is willing to accept limited liquidity, they may consider non-traded REITs. These REITs can offer potential income generation and diversification within real estate, but they require a longer holding period and may have higher fees. Ultimately, the specific investment goals, risk tolerance, liquidity needs, and time horizon of the individual investor will play a significant role in determining the most suitable type of REIT in real-world scenarios.

Final thoughts: Publicly traded or non-traded REITs?

Deciding between publicly traded and non-traded REITs ultimately depends on an individual’s investment objectives, risk tolerance, liquidity needs, and time horizon.

Publicly traded REITs offer accessibility, liquidity, and the potential for capital appreciation, making them suitable for investors seeking market exposure and flexibility. Non-traded REITs, while providing potential income generation and diversification within real estate, come with limited liquidity and potential valuation uncertainties.

They may appeal to investors with longer investment horizons and a higher tolerance for illiquidity. It is crucial to conduct thorough research, consider professional advice, and carefully evaluate the specific terms and conditions of each REIT before making a decision. Diversification within an investment portfolio is also recommended to mitigate risks and achieve a well-rounded real estate investment strategy.

Alice
Author: Alice