Non-listed REITs (“nREITs”) typically invest in commercial real estate assets, and today’s nREIT offerings provide a diversity of commercial real estate investment opportunities. Commercial real estate investments can be differentiated by their investment risk strategy and their commercial real estate sector focus. Investors should understand these two aspects of a nREIT’s overall investment strategy to properly assess the risks of investing in a given nREIT.
Investment risk strategies can range from core (high performing commercial real estate) to value-add (moderate performing commercial real estate) to opportunistic (long-term, higher risk commercial real estate or commercial real estate related-assets). Core institutional quality commercial real estate minimizes risks by focusing on well-located commercial real estate with strong operating performance and high quality tenants. Value-add commercial real estate adds additional risks with lease rollover, low occupancy, lower tenant quality, and/or market challenges. Opportunistic investments cover a wide range of higher risk investments such as land, weak performing commercial real estate, and a variety of debt investment strategies.
The majority of nREITs utilize a core investment strategy across a wide range of commercial real estate sectors. However, for investors willing to take on additional risk, nREITs provide some good options for an opportunistic commercial real estate investment strategy. United Development Funding IV invests primarily in land and development loans and provides investors with an 8.20% dividend. KBS Strategic Opportunity REIT invests in non-performing loans secured by commercial real estate, but the nREIT has yet to declare a dividend. And, NorthStar Real Estate Income Trust invests in both loans and securities and offers an 8.0% dividend. Each of these opportunistic nREITs can provide investors with higher current yields and higher total returns, but these nREITs do so with a higher risk investment strategy.
NREITs with a core risk investment strategy invest across the major sectors of commercial real estate sectors, which are retail, industrial, office, medical office, apartments, and hotels. Each commercial real estate sector has a different risk profile, but the sectors can each provide similar long-term returns when managed by an experienced and qualified REIT manager. Sectors with shorter lease terms, such as hotels, apartments, and office, are more susceptible to declines in a recessionary market; however, these sectors experience higher growth in a recovering or expanding market. Sectors with longer lease terms, such as retail and industrial, provide greater downside protection but are limited on the upside due to fixed contractual rent growth.
Most nREITs invest within a single commercial real estate sector; however, some nREITs utilize a diversified strategy across a variety of commercial real estate sectors. The table below highlights leading nREITs offered by established sponsors in each of the major sectors of commercial real estate. These nREITs offer comparable dividends, and each of these nREITs opened after the 2008 pricing correction in the commercial real estate market. As a result, these nREITs are acquiring commercial real estate assets at favorable pricing and leveraging these investments with attractive long-term financing. Each of these nREITs represents good opportunities among the numerous current nREIT offerings.
Core Non-Listed REITs-Strategy-Dividend:
- Cole Credit Property Trust III-Retail-6.50%
- Industrial Income Trust-Industrial-6.25%
- Wells Core Office Income REIT-Office-6.00%
- American Realty Capital Healthcare-Medical Office-6.60%
- KBS Legacy Partners Apartment REIT-Apartment-6.50%
- Carey Watermark Investors-Hotel-4.00%
- Inland Diversified Real Estate Trust-Diversified-6.00%
Given the diverse investment opportunities in nREITs, potential investors should carefully weigh the investment risk strategy and commercial real estate sector focus in making their investment decisions. Investors should be careful to diversify their investments across different strategies and avoid overweighting their nREIT investments with one particular nREIT or one particular commercial real estate sector. In addition, investors should pay attention to the commercial real estate property cycle and shift their nREIT allocation to sectors with higher growth as the commercial real estate cycle enters its recovery and expansion phases.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.