Is the storm over for private REITs? (2024)

FAQs

Are private REITs risky? ›

Private REITs generally carry higher risks because they are subject to less regulatory oversight and offer lower transparency. These REITs often invest in high-yield properties, which can be more vulnerable to market volatility and economic downturns.

With capitalization (cap) rate spreads remaining wide, there is likely more fuel in the tank for REIT outperformance in 2024. REIT occupancy rate and pricing advantages have combined to suggest that REITs offer more for less and present an opportunity for real estate investors.

FALLING REAL YIELDS MAY SPARK REIT RALLY

With real yields appearing to have peaked in late 2023, prospects of falling interest costs and lower discount rates may provide meaningful tailwinds for the capital intensive, long-duration REIT market.

There are three key reasons to invest in listed REITs right now, starting with the fact that REITs have outperformed stocks and bonds when yields and growth move lower. Demand is healthy while supply is constrained, and REIT valuations relative to the broader equity market are meaningfully below the historical median.

While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.

Can You Lose Money on a REIT? As with any investment, there is always a risk of loss. Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.

REITs Outperform Stocks During Recessions

The stock market is extremely volatile during recessions. Publicly traded stocks rely heavily on the performance of the companies that are being traded in order to succeed. During a recession, those companies struggle, and their stock value drops.

But with the Fed signaling a potential pause on rate hikes, the time for a recovery in REITs may finally be near. And if investors look beyond negative headlines on interest rates and empty office buildings, there are actually plenty of opportunities with strong fundamentals to be found.

High interest rates make it more expensive for REITs to invest in new properties. They also tend to mean REITs' yields, a big part of their appeal to investors, are less competitive with other income investments.

Interest Rates. During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.

Why are REITs crashing? ›

Mortgage REITs were affected by the sharp rise in interest rates during 2022 and 2023, and again have been under pressure on the “higher for longer” news.

REIT bankruptcies have indeed been a rarity since the REIT debacle of the mid-1970s, when high leverage and highly speculative real estate investments resulted in numerous REIT failures.

After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.

Risks of Non-Traded REITs

Non-traded REITs or non-exchange traded REITs do not trade on a stock exchange, which opens up investors to special risks such as: Share Value: Non-traded REITs are not publicly traded, meaning investors cannot research investments. As a result, it's difficult to determine the REIT's value.

Barring a major economic contraction, we expect REIT fundamentals to remain steady for most property types given long lease durations, low supply risk and defensive- and secular-based demand. The current spread between REIT implied valuations and private real estate values remains wide.

However, REITs are not risk-free: they may have highly inconsistent, variable returns, are sensitive to interest rate changes are liable to income taxes may not be liquid, and can be dramatically affected by fees.

The potential downsides, or CONS, of a REIT investment include the fact that they are taxed as income, the variation in the fee structures of different managers, and market volatility due to interest rate movements or trends in the real estate market.

There are also unique tax advantages associated with investing in private REITs. Since they're structured as pass-through entities, REITs do not pay federal income tax at the corporate level. Instead, income and deductions flow to the individual investors. This can lead to potentially lower overall tax liability.

Higher Return Potential

Private investments involve a number of risks, including illiquidity, lower transparency and less regulatory oversight than is found in public securities. They are also frequently early-stage or involve untested business models and management teams.