Private REITs Bloom
Amid Property Boom
The entire real-estate world is on fire with investors right now, but one of the hottest corners is private REITs.
These obscure real-estate companies invest in all types of commercial properties from office buildings to apartments to malls. Their shares don't trade on any exchange, and they shouldn't be confused with the much larger public real-estate investment trusts.
Private REITs, which are being heavily marketed, are sold almost exclusively through financial planners and advisers. Unlike public REITs, they have a fixed price of $10 a share. After a set period of time -- usually seven to 14 years -- private REITs are either taken public or liquidated and the proceeds are distributed to investors. In the meantime, investors usually receive a hefty annual dividend of approximately 7% to 8% -- higher than most public REITs pay currently.
About $7 billion was invested in private REITs in 2003, compared with the $4 billion invested in 2002. That, in turn, was double the $2 billion invested in 2001, according to the Investment Program Association, a trade group based in Washington, D.C.
One big downside with private REITs: Investors pay hefty initial fees of between 5% and 16%. Much of this goes toward paying commissions to planners who peddle the REITs. That means as little as 84 cents out of a dollar invested go for the actual real estate.
Some in the private-REIT industry say the fees are comparable with those charged to investors when a publicly traded REIT conducts secondary offerings. They also say fees will get lower as more individuals buy shares, because more investors means a greater base over which to spread costs.
Not everybody can buy private REITs. The minimum threshold for investors is typically a net worth of at least $150,000 (excluding homes, furnishings and automobile) or gross annual income of $45,000 and a net worth of at least $45,000. Investors must typically buy a minimum of 250 shares, or $2,500.
Private REITs are sold through offerings, and then the funds are closed to new investors. The result is that real-estate companies are starting them all the time.
The Inland Real Estate Group of Cos., Oak Brook, Ill., launched a new private REIT late last year, its third, that buys retail properties in western states. CNL Securities Corp. of Orlando, Fla., is gearing up to launch its third nontraded REIT. W.P. Carey & Co., of New York just launched its 15th REIT, which will buy single-tenant properties both in the U.S. and abroad. Wells Real Estate Funds, of Atlanta just launched a second REIT -- like the first one it's focused on office properties.
They've grown so popular that some real-estate companies are offering private REITs for the first time. Hines, a large, Houston-based international real-estate firm that owns 80 million square feet of commercial real estate in 78 U.S. cities and 11 foreign countries, filed a registration statement with the Securities and Exchange Commission discussing plans to launch a private REIT that will raise $2.2 billion to purchase office properties.
Getting information about private REITs is much tougher than boning up on public companies. The companies floating them sometimes have Web sites that give details on its investment strategy -- or even which specific properties may end up in the REIT. Another option is to subscribe to the Stanger Report, a quarterly industry report based in Shrewsbury, N.J., for $447 a year, which lists dozens of private REITs, describes their strategies, and rates them.
Before you buy a private REIT, make sure you know exactly how much of your investment is going for fees. Understand the company's exit strategy -- whether it plans go to public some day or simply hand the money back to investors.
Because private REIT shares aren't traded on any exchanges, they aren't subject to the daily, and even intraday, whims and fluctuations of the market. Some investors see private REIT shares as more stable than publicly traded REITs and stocks in general.
"If you can handle the volatility of the stock market, then maybe you should buy public REITs," says Raymond J. Lucia Sr., a certified financial planner in San Diego, who sells private REITs. "But if you like to see a portfolio that doesn't fluctuate on a daily basis, that won't reflect the emotion of the market, then you should buy nontraded REITs. At least with the private REIT, you can count on the share price being static on any given day."
That, of course, is also one of the risks of private REITs. If the price of a public REIT or stock rises, at least it can be sold for a profit. Not so with a private REIT: The shares don't change in value unless they're eventually listed on a public exchange. That makes it particularly important to get comfortable with the REIT and its management on the front end.
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