Non-Listed REITs Regain Fundraising Momentum

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The non-listed REIT sector appears to have rounded an important corner. After a slump in fundraising, the sector is once again capturing more capital flowing into the space.

Robert A. Stanger & Co. reported that fundraising for non-listed REITs accelerated during the first quarter with a total volume of $938.1 million, which is up 6.9 percent compared to the $878 million reported in the fourth quarter of 2017 and 18.1 percent compared to the $794 recorded in the third quarter of last year. “I believe there are some tailwinds and we will see incremental improvement throughout 2018 and a significant shift going into 2019,” says Anthony Chereso, president and CEO of the Institute for Portfolio Alternatives (IPA).

One of those notable tailwinds is that more investors are looking to increase allocations to commercial real estate. That growing appetite is being fueled by a broader investment industry shift from traditional defined benefit retirement investing (pension plans) to defined contributions plans (IRAs and 401ks).

According to the Department of Labor, there has been a 700 percent increase in defined contribution plan participants since 1975. During that same period, the number of defined benefit participants has fallen by 44 percent. A 2018 study conducted by Willis Towers Watson found that only 16 percent of Fortune 500 companies now offer direct benefit plans, which is a sizable drop compared to the 59 percent who offered those plans in 1998.

Institutions have increased allocations to alternative investments over the past few years to create more diversity and stability within investment portfolios. Retail investors, individually and with the help of their financial advisors, are applying a similar strategy. As a result, more capital is flowing into alternative investments, including non-listed REITs. “The pie is getting bigger, and it is going to get exponentially bigger year after year because of the continued shift to defined contribution plans,” says Chereso.

Retirement savings flow to CRE

Growing allocations from retirement savings represents a huge growth opportunity for non-listed REITs, says Raj Dhanda, CEO at Black Creek Group, a real estate investment management firm. Over the last 20 to 25 years, institutions have allocated in excess of 10 percent to commercial real estate, while individuals today allocate less than 1 percent of assets to commercial real estate, he says. So over the next five years there is the potential that upwards of $100 billion should get allocated from individual retail investors into commercial real estate solutions, he notes. Black Creek has roughly $8 billion in assets under management, including two non-traded NAV REITs.

The growth potential has caught the attention of some big name financial institutions. Blackstone has emerged as a dominant force in the sector since launching its NAV REIT in September 2016. Blackstone Real Estate Income Trust now ranks number one in fundraising, raising more than $1.8 billion in 2017 and another $633 million in first quarter, according to Stanger.

More evolution ahead

Certainly, the growing pool of investors and more capital targeting alternative investments is exciting for non-listed REITs. The flipside to that is that there is a lot of transition occurring within the sector along with an influx of several strong competitors and the addition of new REIT products. For example, Phillips Edison announced earlier this month that its registration of the new Phillips Edison Grocery Center REIT III Inc. (PECO III) is now complete.

As non-listed REITs continue to work to improve transparency and reduce fees, there has been a move away from legacy “lifestyle” REITs, or those that offer a typical five- to seven-year hold of assets followed by a liquidation event. Rather, more sponsors are gravitating towards perpetual NAV REITs that provide regular liquidity at net asset value. In addition to Blackstone and JLL, Stanger noted that new NAV products have been recently introduced by Starwood, Nuveen, FS Rialto and Oaktree, while conversions of lifecycle to NAV REITs have been completed by Black Creek, Griffin and Hines.

“The evolution of space is no different than any other financial product,” says Chereso. Competition changes fee structures, the value proposition to investors and puts more pressure on performance. Other sectors, such as mutual funds and exchange-traded funds, have followed that same path. “That is all to the benefit of the retail investor,” says Chereso.

Blackstone has also been one of the market leaders to open the door to sales through the wirehouse channel. For example, about 80 percent of the capital that Blackstone has raised has been flowing through the major wirehouses, while the other 20 percent has come through the independent broker-deal channel—the traditional channel for lifecycle REITs, according to Chereso. The broadening of sales channels is attracting more capital.

Across all channels, individuals want more of an advisory relationship that focuses more on asset allocation and less on single asset selection, adds Dhanda. Research shows that real estate performs better in the late innings of a cycle. Real estate returns are more income oriented and it offers a hedge against inflation because rents can be increased. “So I think there is a really solid investment thesis behind commercial real estate that is growing,” he says.  

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